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Deal Reached at the EU Summit

July 21, 2020 By Mircea Vasiu

The much-anticipated EU Summit that started last Friday ended in today’s early hours. After marathon negotiations, the EU leaders agreed on the structure of the Recovery Fund destined to mitigate the economic impact of the coronavirus pandemic. 

Viewed as a game-changer and a road-opener for the future of the European Union and how it is arranging its financing, the deal is yet another blow to Euro doomsayers. Each and every crisis so far has been a reason for Euro-doomsters to predict the collapse of the European Union. Yet, the EU survived, and the marathon summit only reveals the complexity of the decisions needed to be taken.

Grants vs. Loans – Solidarity Prevails

The key discussions this summit was on the size of the grants offered to various states members of the European Union and the size of the loans. Unsurprisingly, as the media announced, Northern states favored more loans instead of grants, while Southern states favored the opposite.

In the end, a deal was reached for €390 billion in grants and €360 billion in low-interest loans. Equally important on the agenda was the proportion of loans vs. grants to each country, as the coronavirus affected the European Union members differently. Also, still on the top of the agenda was the way to spend the funds. What are the priorities once the money arrives?

As it turns out, almost a third of the funds are destined to fight climate change. The ambitious EU Green Deal sets the stage for the biggest green stimulus package possible as climate change remains on top of the EU citizens’ priorities.

The currency market reacted differently to the news. In a way, it was expected, as the Euro pairs traded with a bid tone since the start of the previous trading week. As things dragged in Brussels, it was obvious that the EU leaders would not leave the Belgian capital without a deal. Considering the summer holidays ahead, it was imperative for a deal to be reached.

While the EURUSD and EURJPY pairs held their levels, the EURGBP and EURAUD pairs tanked more than a hundred pips since the start of the trading week. The move is consistent with a risk-on environment, when the stock market is on the rise, the AUDUSD moves higher, sustains the EURUSD with a bid tone, and favors a lower EURAUD.

If the risk-on move is set to continue, the stock market is poised for more gains further in the trading week.

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