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The European Union fights again over the amount of bailout funds. Recovery funds continue to struggle to produce euro short-term upside space is limited
Jul 20,2020 10:32CST
Source:Huitong network
The content below was translated by Tencent automatically for reference.

SMM: the EU summit held in Brussels has been extended to July 19, and 27 EU leaders have been unable to agree on a EU economic recovery plan for the "post-epidemic era". It is reported that the new EU proposal will reduce the allocation in the recovery fund to 450 billion, but EU leaders remain deadlocked. As the European recovery fund is still difficult to give birth, the euro continues to be under pressure after July 20, and the short-term upside space may be limited.

The EU summit has been postponed due to differences, but no compromise has been reached.

On July 18, local time, the EU special summit entered its second day and the last day of the original plan. Despite hours of intense negotiations, EU leaders still failed to reach a consensus on the economic rescue plan as scheduled. According to the European Council spokesman for the evening of 18 local time, EU leaders decided to postpone the summit for one day to continue consultations on related issues on July 19.

On the evening of July 19, European Council President Michelle (Charles Michel) called on EU leaders to overcome their fundamental differences and reach an agreement on a 1.85 trillion euro ($2.1 trillion) EU budget and epidemic recovery fund to deal with the crisis facing the euro zone. Michelle warned that the epidemic has killed 600000 people worldwide and brought an unprecedented recession to the European Union. "I hope we can successfully reach an agreement, and I hope the European media will report on it tomorrow that the EU has successfully accomplished an impossible task," Michelle said. "

Even if German Chancellor Angela Merkel and French President Jean-Claude Macron negotiate as their closest partners, the traditionally strong Franco-German union will not bring together the 27 bickering countries of the euro zone. In the marathon negotiations, EU leaders repeatedly used words that were not in line with diplomatic principles, such as "hate" and "grumpy". The negotiations were supposed to unite countries to fight the historic recession in the eurozone. The epidemic has thrown the EU into chaos, killing about 135000 EU citizens and the EU economy is estimated to have contracted by 8.3 per cent this year.

The European Commission has proposed the establishment of an economic recovery fund of 750 billion euros to distribute funds in the form of loans and grants to the countries most affected by the epidemic, partly through co-borrowing. Long before the outbreak, EU leaders had been arguing for months about the EU's 1 trillion euro budget for the next seven years.

All countries agree that they need to unite, but five rich countries in the north, led by the Netherlands, want strict controls on spending, while struggling southern European countries, such as Spain and Italy, say these conditions should be kept to a minimum.

EU leaders are deadlocked over the way recovery funds are allocated

It is reported that during the discussion on July 19, the European Union proposed to reduce the grant funds of the recovery Fund to 450 billion euros. The total amount of the recovery fund is 750 billion. 500 billion of the previous proposals were paid in the form of donations, but the amount of donations proposed is now reduced to 450 billion. The new plan will include a "super emergency brake" that will allow a member to suspend funding if the country has doubts about whether the funds will be used properly. It is reported that European Council President Michelle Michel agreed to reduce the size of the recovery fund to 450 billion euros.

Dutch diplomats said the new EU recovery fund proposal was a "smart move" and that the new EU recovery fund plan was an important step in the right direction. In order to meet the requirements of the Netherlands, the new plan will include a "super emergency brake", which will allow a member country to suspend funding if it has doubts about whether the funds will be used properly. After the European Commission approves the payment, governments will have three days to raise objections, which must then be resolved by EU leaders or finance ministers.

The Dutch position highlights deep divisions within the EU, with fiscal conservatives such as Austria, Denmark and Sweden insisting on strict regulation of any new debt. According to the latest news, hardliners led by the Netherlands have proposed to set the allocation size of the EU recovery fund at 350 billion euros.

EU officials' aides say EU leaders are divided on the issue that the total free allocation of the recovery fund should be 350 billion euros or 400 billion euros. Ms Merkel said she still could not guarantee that a solution could be found. Austrian Chancellor Kurtz said he still believes an agreement is possible, but "there is still a long way to go." Macron believes that leaders need to compromise, but still respect the basic principles and objectives of the European Union. Macron said a deal was still possible, but he wanted to make it very clear that these compromises would not come at the expense of European ambitions.

European Central Bank President Christine Lagarde said on July 19 that it was much better for EU leaders to take a little more time to reach an ambitious financial aid package than to reach a deal quickly at all costs. Ideally, the financial aid package agreed by EU leaders should be ambitious in size and composition, and broadly in line with the European Commission's proposal. Lagarde also warned that the financial aid package was designed to help Europe emerge from its worst recession since World War II, but world leaders continued to argue over the details. this increases the risk that the aid package will be delayed or shrunk.

Analysts pointed out that the European economy is showing signs of recovery, but monetary and fiscal policies have failed to play a good synergy, and there is still great uncertainty about whether Europe can maintain its recovery in the second half of the year.

The EU is deadlocked on the issue of rescue funds, and the short-term upside of the euro is once again limited.

EURUSD passed the 1.14 mark on Friday against a backdrop of investor optimism about the prospects for bailout fund allocation at the EU summit, but the meeting has been far less smooth since the weekend, with the two-day summit being postponed by one day, but still unable to achieve the expected results.

Affected by the above negative news, the EURUSD opened lower in early Asian trading on July 20, and although it rebounded after the same decline in the dollar index, after all, concerns about the economic outlook in Europe turned down again, and market concerns continued to rise. This means that if the EU fails to finalise the bailout package as soon as possible, some financially troubled economies, such as Italy, may face "cliff" fiscal pressure and could re-trigger political risks full of centrifuge towards the EU. Once this is the case, the uptrend of the previous euro exchange rate will be difficult to sustain. Short-term support temporarily looks down at last week's low of 1.1371, which will mean a reversal of the general trend of the market.

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