The recently agreed €1.8 trillion EU spending package, if successfully implemented, should enhance the flow of investment toward the euro area, where more positive sentiment has already given the currency a boost. For longer-term investors, much will depend on the specifics of implementation as well as structural reforms, which include addressing flaws in the eurozone’s design.
European Union (EU) negotiations over the 2021-2027 budgetary framework and recovery plans may have been tough, but Europe looks to be back on track, not least because of a fresh and vastly more dynamic leadership at the EU Commission.
Binding the two spending vehicles together gives the EU Commission greater leverage over EU-wide spending, while the EU Council used the negotiations to tighten up budgetary controls.
The plans should help calm the acrimony that arose over differences on how to fund the pandemic recovery as well as pave way for the Commission to launch new and interesting projects – of which climate will take a substantive part. This reinforces environmental, social and governance (ESG) factors as a key component to investment in the EU. Resilience – or bringing supply chains closer to home – is another focus.
But all of this is subject to parliamentary approvals and the European Parliament has already objected to a number of cuts to the 2021-2027 framework agreed during the EU Council Summit.
If all goes according to the EU Council’s decision, the Recovery Fund is to be spent alongside the Multiannual Financial Framework (MFF, Figure 1) although it will be funded in a different way. The Recovery Plan will be financed through borrowing on the fixed income markets rather than through contributions from member states or via imposing a levy on their tax revenues.