Market Overview

The long-awaited EU summit in Brussels lingers, as Monday happens to be the fourth day of haggling. It seems like the forecasts of Hungarian Prime Minister Viktor Orban, who said that the summit would reach an agreement even if the negotiations drag on for a week, are beginning to come true. At least, in terms of the length of the country leaders' talks. The summit was originally supposed to be completed in two days. But now it is the second in length after the discussions at the EU meeting of presidents and prime ministers in Nice in December 2000, which lasted for five days, and there was also a fight for national interests, often to the detriment of the common European strategy.

Differing points of view remain over the issue of how to distribute the €750 billion recovery package adopted among the countries affected by the coronavirus, and another round of negotiations between EU leaders is expected to start today after 14.00 GMT. As Bloomberg reported, citing "an official familiar with the matter", the EU hardliners are ready to accept €390 billion in grants on a recovery fund instead of €500 billion initially proposed by the more ambitious French plan.

Charles Michel, the President of the European Council, reminded the 27 EU leaders at the very beginning of the meeting that "more than 600,000 people had now died as a result of the coronavirus around the world", and he added that "it was up to them to stand together" in the face of the unique crisis. "My hope is that we reach an agreement and that the headline ... tomorrow is that the EU has accomplished mission impossible," he said. "That is my heartfelt wish ... after three days of non-stop work," Michel stated.

But a group of "frugal" and rather prosperous North European states including Austria, Denmark, the Netherlands and Sweden, later joined by Finland, pushed for a smaller size of recovery fund and also sought to limit how pay-outs are split between grants and repayable loans. For example, Dutch Prime Minister Mark Rutte's position reflects the political realities in his country, where a lot of his voters do not agree that the country is, proportionately, among the largest net contributors to the EU budget, and his party face a strong challenge from Eurosceptic politicians as new elections are scheduled to take place in March in the Netherlands. 

Just on Sunday evening, the previous attempt to reach a compromise failed as a deal envisaging €400 billion Euros in grants, which is €100 billion down from the originally discussed €500 billion package, was still rejected by the north group of countries, which said they may agree on a €350 billion sum as the maximum. Mark Rutte also insisted that EU member states should retain the final vote to approve the allocation from this anti-crisis fund, meaning that he probably wants the EU supervision mechanism to oblige countries, such as Spain and Italy, to reform their economies so that they can better cope with future crises. Italian Prime Minister Giuseppe Conte accused Denmark, the Netherlands and their allies of "blackmail" since his country would naturally like to spend money according to their own plans and economical principles and help those companies they consider necessary to help themselves without a severe supranational control.

Differences exist also over a proposed new "rule-of-law" mechanism that could freeze funding to countries like Hungary and Poland, as both of them were accused as if they do not follow democratic principles well. So, these two countries threatened to rejection the package if their expense is  dependent on the meeting conditions to uphold the "rule-of-law". There is also a package for the EU's next long-term budget up to 2027 on the table.

The final failure of the summit may upset financial markets, but for now, the pan-European Euro Stoxx 50 index fell only to 3,330 points level at the opening from 3,373 value at the close of Friday's trading session, and then recovered to 3,378 before noon. The French CAC40 index behaved in a similar way, as it refused to fall below the 5,000 psychological mark. European stock exchanges are also supported by growth in the Chinese stock market, where the Shanghai Composite index climbed more than three % on Monday despite last week's big correction after the US White House ended a preferential economic treatment status for Hong Kong.

Yet, the likelihood that most are confident that the worse of a better recovery fund agreement will be concluded sooner or later, as well as a reasonable pause in increasing new bond purchases by the European Central Bank (ECB) together with excessive money "printed" by the US Federal Reserve, prompted the single European currency to grow again, so that EUR/USD came closer to the 1.1470 level on Monday. Just one or two steps away from a possible breakthrough attempt above 1.15.

By the way, the ECB President Christine Lagarde said it would be better for the EU leaders to agree to an "ambitious" aid package than to have a quick deal at any cost. "Ideally, the leaders' agreement should be ambitious in terms of size and composition of the package ... even if it takes a bit more time," she told Reuters over the weekend. So, at least Mrs Lagarde's comments suggested she was relaxed about the possibility of a frustrated reaction on financial markets if the summit fails, especially as the ECB has more opportunities to buy up government debt according to the ECB's own plans.

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