Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Macroeconomic Research
Summary: At today's meeting, EU leaders endorsed the three safety nets negotiated by the Eurogroup two weeks ago and gave mandate to the EC to present a proposal of recovery fund backed by the multi-annual budget on the next meeting scheduled on May 6.
Earlier today, I wrote a tweet on Twitter saying that we could consider the EUCO meeting is a success if EU leaders agree on key principles for a big recovery fund, which would mean that tensions between Northern Europe and Southern Europe have eased. There are still plenty of pending issues that need to be addressed, as we will discuss in this note but, overall, the outcome of the summit is rather encouraging given that expectations were not high and the EU is functioning based on lengthy deliberation and consensus.
Summit results
The battle lines ahead
For those who prefer to see the glass as half full, what is remarkable about the meeting is that there is a broad agreement that more is needed to face the crisis and that the recovery/MFF plan should be consisting in both loans and grants. There are reasons for hope.
For those who prefer to see the glass as half empty, the EUCO represents a major failure to show solidarity in a timely manner to EU countries in disarray, and it seriously questions the ability of the EU and the eurozone to act fast when most needed. The political credibility of the UE has already been damaged through the loud disputes of the past weeks while the economy is falling apart, capex intentions are collapsing, companies are cutting headcounts and PMIs are an horror show. A strong political signal at the forthcoming meeting will be required to repair the damages caused by the EU leaders’ complacency.
In our view, a physical meeting will be needed to narrow differences about the MFF/recovery fund, which means that it will take longer than May 6 to reach a final agreement. And when it will finally happen, we will have to analyze it thoroughly in detail as the EU has often the bad habit to re-classify /re-direct already planned expenditures which makes the real package often much smaller !
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