The European Union’s $826 billion stimulus plan to battle the coronavirus is ‘too small and too late,’ analysts say

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  • The European Union on Wednesday proposed a 750 billion euro recovery package as the economic bloc attempts to crawl out of its worst economic crisis in decades.
  • Representing a major step towards a revival of the 27-member union, the EU fund is expected to be financed through borrowing, by issuing long-term government bonds in global financial markets.
  • While analysts at Bank of America believe the EU fund is a decent starting point to negotiations, they say it is “too small and too late” for urgent economic needs.
  • Goldman Sachs analysts praised the plan as more “ambitious” than the Franco-German proposal valued at €500 billion.
  • Visit Business Insider’s homepage for more stories.

The European Union this week proposed a recovery package valued at €750 billion (about $826 billion), to revive the 27-member bloc from the devastation of the coronavirus pandemic. 

The official process for negotiations will kick off with informal discussions between the European governments, followed by the first formal discussion in the Eurogroup on June 11. 

Once all EU leaders reach an agreement, a formal approval by the European Parliament will be able to set off a final ratification by the 27 national parliaments. 

Disbursement of funds is expected to begin from January 2021 until the end of December 2024, financed by the issuance of bonds with maturities between 3 and 30 years.

The package is by far the largest fiscal stimulus package in Europe’s history, far outstripping the measures taken during the financial crisis and after World War II, but it may be too little, too late, according to some analysts.

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‘Too small and too late’

Bank of America analysts believe the economic stimulus is “too small and too late” to meet urgent economic needs, but said the package’s “symbolic power likely trumps the economics.”

They added that the proposal’s details will take time to digest since in typical European fashion, it is spread across a plethora of pages. They also warned of conditions attached to the aid provided and expect more clarity in coming days.

‘Ambitious’ relative to the Franco-German proposal

macron merkelReuters

Germany and France, the EU’s biggest economies, announced their common proposal for a €500 billion ($550 billion), fund on May 18. Although the Franco-German proposal was based entirely on grants, basically giving money to EU countries, the Commission’s proposed fund expects to borrow loans from the global financial markets.

Compared to the Franco-German proposal, Bank of America analysts called the EU’s latest recovery fund “tentative good news.”

Analysts at Goldman Sachs added that the EU recovery fund is “close to the Franco-German proposal, but somewhat more ambitious on the loan-based mechanisms for investment.”

Fund disbursement across member states

The European Commission said it plans to split the money based on need, with about 20% each for Italy and Spain, significantly higher than 10% for France and 7% for Germany.

The indicative allocation of resources for Italy was in line with expectations, said analysts led by Sven Jari Stehn, head of Europe economics at Goldman Sachs, adding that it was much larger for Spain, Greece, and Poland. 

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Need for speed, but heated debate and hurdles ahead

Since details of the recovery package are yet to be worked out, deliberation could take months and may involve heated debate among the “frugal four” — Austria, Sweden, Denmark, and the Netherlands — and other member states, said Craig Erlam, a senior market analyst at OANDA Europe. 

The recovery plan signifies “the first time the European Commission will borrow on behalf of the EU anywhere near this scale and could be an important first major step towards shared debt.”

Erlam said it is too early to know whether the €750 billion plan will be sufficient, or whether it will be disbursed effectively. Although there is plenty to be critical of with respect to Europe’s response, investors are clearly encouraged by the substantial proposed amount, he added. 

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‘Stop gap measure’

One wealth manager told Business Insider the EU fund is a mere “stop gap” plan of action.

“While the EU relief package will certainly help things in Europe, it appears to be more of a stop gap measure and pales in comparison to actions taken by the US government,” said Zach Abraham, chief investment officer at Bulwark Capital Management.

In its current structure, Abraham said, the EU cannot survive. What will likely happen is that Germany will back down on European Central Bank guidelines that restrict quantitative easing and other forms of monetary stimulus, and countries such as Italy and Spain will be forced to leave, he said.

europe ford factoryPicture Alliance/Getty Images

Analysts at Deutsche Bank said that they’re concerned about whether the budget proposal can align with the EU’s priority to transition to a green economy — achieving carbon neutrality by 2050 — and catching up in the digital race along with the US and China.

If resources are “mainly used for the repayment of the Recovery Facility, consistency between crisis recovery and long-term priorities can only be achieved by strongly linking the recovery funds to the long-term objectives in the first place,” they said.

However, they also underlined positive initial reactions by Southern European leaders, including the Italian Prime Minister Giuseppe Conte who said the EU fund was a “great signal,” while Spanish PM Pedro Sanchez said it met “many of Spain’s demands.” 

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https://markets.businessinsider.com/news/stocks/what-eu-826-billion-covid-19-stimulus-package-means-2020-5-1029265252

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