EU agreement: a powerful answer that can lift further EU assets and ESG investing

In order to reach an agreement, the other EU member states therefore had to make concessions:

• The share of grants fell below the symbolic threshold of €400bn, which was the minimum required by France and Germany and the Southern European countries.
• The Frugal countries have obtained a further increase in rebates (they are still net contributors, however).

To formally come into force, this compromise requires the approval of Parliaments in many countries. This will probably have to wait until the end of the year.

It should also be noted that (see details in the box in the next page):

• The allocation key is virtually unchanged from the European Commission's original proposal.
• States will have a right of control over the sums disbursed (but no country will have a veto).
• Emphasis is placed on energy transition (30% of expenditure will be devoted to this).
• The Europeans intend to set up an own resource by 2021, which can be increased over time.
• The Europeans have made no concessions with respect to the rule of law.

Ultimately, this is much more than a stimulus package. From a fundamental standpoint, this is a very significant step. For the first time, the EU will mobilise the budget in a counter-cyclical manner. Fiscal policy thus becomes a stabilisation instrument in the event of a crisis. We see this Recovery Fund as a permanent tool to promote real convergence (see Covid-19 crisis, a catalyst for change and strengthening the EU, Borowski& Blanchet July 2020 ).

• The loans will enable the fragile countries (those hardest hit) to take on long-term debt at rates they would not obtain with their own signature, thanks to the European Commission's triple-A rating.
• For the first time the EC would issue debt on behalf of the EU with the objective of convergence and redistribution between countries.
• It's not a zero-sum game. The borrowed sums will have to be repaid but not before 2028 (and by 2058). This means that all EU countries (including net contributors) will benefit from this massive borrowing in the coming years.

The North/South divide is less pronounced than during the sovereign debt crisis.

This European Council – the longest in the history of the EU – is in many ways reminiscent of the meetings to save Greece and monetary union. There are resonances with the sovereign debt crisis. As in 2010, the Union is divided between North and South. But, there is a big difference: today, Germany has changed sides and the northern camp has fractured. The Netherlands has been able to unite other small countries which, like that country, do not have confidence in the ability of the countries of the South in general, and Italy in particular, to reform themselves or in the Commission's ability to enforce budgetary discipline. Having said that, there is nothing in common between the Greek crisis and the consequences of a pandemic. Angela Merkel and Emmanuel Macron remained united throughout the negotiations.

The opposition of the frugal countries nevertheless shows that even without the UK, France and Germany cannot secure a deal alone.

Next steps and the role of the ECB

This Fund gives the countries of the South (and Italy in particular) the opportunity to re-convert towards the rest of the EZ. Time had to be bought. The combined support of the ECB and the EU offers a unique opportunity to address the growing economic fragmentation of the area. But it would be a mistake to believe that the essential has been done.

The monetary union must be completed, the CMU deepened, the banking union achieved and ambitious reforms implemented in the countries of the South (and in Italy in particular), which are the only way to increase potential growth in the medium term.

The road ahead will be long and difficult, but Europe crisis after crisis has shown that it is capable of meeting the challenges.

Against this background, the ECB will have to continue its programmes, ensure that monetary conditions remain accommodative and combat financial fragmentation. Having said that, it will undoubtedly be helped by this European plan, as the latter should improve European investors' confidence in the stability of the countries hardest hit by the crisis.

ESG IN FOCUS

Moreover, there is another important aspect to consider regarding the new budget. With a third of the proposed Fund and next budget dedicated to projects that address climate change, we believe that the Recovery Fund will give a significant boost to climate change-related equity investments. There is a growing awareness of this among all stakeholders. ESG investing, which seeks to proactively address these challenges, will continue to grow in importance, in our view. In this, we believe that European companies are particularly well positioned given their technology and know-how in working with solutions on ESG and climate challenges. In addition, we see tangible and investible opportunities around the EU green deal.

In fixed income, this would provide a significant boost to the green bond market. With already more than €60bn of new green bonds issued this year, this market has kept up its momentum in line with last year, despite the Covid-19 crisis. The growth of the green bond market is tightly linked to the amount of real investment in climate projects. The commitment of 30% of EU spending towards climate action is a very positive outcome for the green bond market:

• A boost in the next three years, thanks to the European Recovery Fund worth €750bn;
• A long lasting trend with the EU 2021-2027 budget of 1 074bn€
• Issuers will use this financial instrument to show their commitments to financing green projects and this may help increase diversification in terms of issuers, sectors, types (IG vs HY), and structures of issuance (loans, bonds, seniority).

This should provide an interesting opportunity for investors.