How Merkel can smooth the recovery fund proposal

If agreed, how will the European Recovery fund impact the EUR/USD?

The European Recovery Fund is a €750 billion post COVID-19 fund designed to support the eurozone. This will be alongside the already proposed €1.3+ trillion PEPP program However, not all the nations are in agreement with the Recovery Fund’s terms as they are against grants being given out and would prefer loans. These nations who are deemed as being most at risk of rejecting the proposed fund are Austria, Denmark, Sweden, and the Netherlands. They are known as the ‘frugal four’ and have the potential to de-rail the proposed fund and sink the Euro. The FT had an interesting piece recently on how Angela Merkel might be able to persuade the so-called ‘frugal four’ to stay on board with the European Recovery fund.

How Merkel can persuade the frugal four?

According to the Financial Times, Ms. Merkel is able to make some headway in appeasing the frugal four by saying that EU countries must show a willingness to reform their economies and ‘future proof’ them. In essence, it is a way of adding strings to the receipt of the recovery fund. You can read the full article here (it may be gated). Ms. Merkel will seek a compromise in order to support weaker economies in the zone like Spain and Italy, but also without unduly alarming the frugal four.

What’s the impact on the EUR/USD?

If the Recovery Fund is able to be finally agreed, and the frugal four are satisfied enough to support it, then the EURUSD will be supported. Any return to 1.1030 would be considered good value for EURUSD buyers, especially as US COVID-19 cases are rising more and more. The US economy looks like slipping behind the Eurozone economy the longer this US case count keeps rising.

However, if the Recovery Fund is rejected this will surprise the market so expect a sudden and sharp drop in the EURUSD on that news.

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