April 24, 2020

European Council moves towards more burden sharing but refrains from steps towards debt mutualisation

At yesterday’s European Council meeting the head of States unsurprisingly passed the € 540 bn package proposed by the Eurogroup. It shall become operational on June 1.
Moreover, there was agreement to establish a recovery fund as part of the new European budget (MFF). The European Commission was asked to work on details.
Key questions were left unsolved, however, such as the size of the recovery fund and whether it shall provide loans or grants. A typical European compromise containing both elements seems most likely to us.
In the days before the meeting Italy softened its call for “coronabonds” and its opposition to ESM loans. The solution found yesterday strengthens the role of the Commission, possibly reducing the impact of the widely diverging positions among member states. It makes it more likely that Italy will take up ESM credit lines.
While moving in the right direction the lack of details will not relief investors soon.