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Historical Next Generation EU Agreement for Europe

Posted: Saturday, July 25th, 2020

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The EU Summit that ended last Tuesday sets the stage for a historical step for Europe. For the first time, the European Union issues common debt. Moreover, it redistributes the proceeds using a combination of loans and grants.

The Next Generation EU fund represents an extraordinary recovery effort. It is one of the boldest plans in European history, aimed at paving to the road to digitalization and remodeling European economies and societies.

EU Budget and Next Generation EU Agreements Sent Euro Higher

This EU Summit was one of the tensest in the history of European summits. Northern states, called “frugals”, insisted that more of the funds involved in the European recovery from COVID-19 pandemic damage will be loans rather than grants. Southern states, having a dire financial situation, insisted on grants.

In the end, the solution is a mix of grants and loans. It differs from the original plan proposed by the European Commission a few months ago.

To meet the demands of the frugal North, the initial Next Generation EU plan changed.  Nevertheless, the European Union made a historic step this week for at least a few reasons.

To start with, the EU borrows to support spending. This is the first, albeit embryonic form, of a common fiscal policy framework.

Moving forward, loans obtained at concessional rates are institutionalized, another step to further integration. Finally, the distribution of funds or transfer between member states takes the shape of a well-defined fiscal framework – something to build upon in the years ahead.

ECB – A Key Player

The European Central Bank (ECB) played a crucial role in these developments. In the last four months, it guided financial markets and politicians towards what we see today as one of the major accomplishments in the European monetary and fiscal space. The deviations from capital keys, the efforts to bring back Greece on track, and the Pandemic Emergency Purchase Programme (PEPP) are only a few examples of the proactive role played by the ECB under the leadership of Christine Lagarde, its President.

Financial markets celebrated the EU Summit outcome. Euro traded with a bid tone two weeks before the start of the summit and did not stop ever since.

The EURUSD closed yesterday above 1.1650, almost ten big figures higher than in March 2020. Moreover, the EURGBP cross sits comfortably above 0.91, defying the damage created by the Brexit referendum.

If anything, the United Kingdom leaving the European Union led to a closer Franco-German relationship. One that stands at the center of the historic deal announced this week.

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