EU Council Result: Nowhere Near a Recovery

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The EU Council agreed on a package which was negotiated by the EU finance ministers in the last few weeks. The main component of this deal is for countries to use ESM (European Stability Mechanism) loans with limited conditions. Other parts of the deal include a EUR €100 billion joint unemployment insurance fund and the EIB (European Investment Bank) to supply EUR €200 billion liquidity to companies. The statement afterwards said the European Commission will work on establishing a recovery fund "which is needed and urgent", but provided no details on size and conditions.

This agreement will not be met with great enthusiasm, neither in countries hit hard by the crisis nor on financial markets. The Italian government has clearly indicated it does not want to apply for ESM rules and also considers this package to be far too small to make a difference to its battered economy. Other European governments like those in France and Spain, have pushed for (temporary) joint issuance instruments and even Germany mentioned the need for a sizeable increase in the EU budget to support the European economy. While the EU postpones taking major decisions on these important topics, financial markets will be facing a steady flow of negative economic news and will have to digest a wall of supply of periphery bonds. The grim PMI data published this week show the clear need for major economic support, especially as the "lockdowns" are extended.. Another problem is the high probability of credit rating downgrades for periphery countries, starting with the rating assessment of S&P for Italy.

All eyes will now turn to the ECB and its Governing Council meeting on 30 April. Even though the ECB has already massively increased its buying of sovereign bonds, periphery spreads managed to widen back to the levels before the ECB started with its EUR €750 billion PEPP (Pandemic Emergency Purchasing Program). With the disappointing outcome of the EU Council and the resulting market volatility, the ECB will probably have to announce another increase in its QE program very soon. Just like during the sovereign crisis in 2010, the EU finds it difficult to agree on a plan, as a result of which the ECB will have to take on the burden of saving Europe in every crisis.

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Hendrik Tuch, CFA

About Hendrik Tuch, CFA

Head of Fixed Income NL, Aegon Asset Management