Merkel and Lagarde Tell EU It Needs to Deliver: Summit Update

(Bloomberg) — European Central Bank President Christine Lagarde and German Chancellor Angela Merkel warned European Union leaders meeting Friday by video conference that if they fail to agree on a stimulus package the consequences could be dire.

The leaders began negotiations on a 750 billion-euro ($840 billion) plan to help their economies rebound from the Covid-19 lockdown, with Germany and France pushing for a deal to be wrapped up next month.

The European Commission, the bloc’s executive arm, has proposed issuing joint debt to finance the program, a radical step that would signal an unprecedented move toward integration among the 27 member nations.

Stumbling blocks to a deal include the total amount that the EU could end up borrowing, the timing of repayments, where the money will come from and how resources will be allocated.

Key Developments:

Merkel says EU is facing very, very difficult timesECB President Christine Lagarde warns leaders of market shock if no agreement is reachedGermany and France call for an agreement before the summer breakMichel says he’ll invite leaders to meet in person mid-July

Michel Proposes Leaders Meet in Person Mid-July (2:02 p.m. Brussels)

Charles Michel, president of the EU leaders’ council, said he’ll call a proper summit for the middle of July, where the group will meet in person for the first time since the pandemic blew up.

Several leaders, including Merkel, have said that a physical meeting will be necessary to broker a deal because it allows for bilateral talks, side deals and more control over leaks.

Lagarde Paints a Bleak Picture of EU in Recession (1:58 p.m. Brussels)

The ECB president said she expects a quarter on quarter decline of 13% in the second quarter for the euro aread and a contraction of 8.7 % in 2020. The worst impact on labor markets is still to come and unemployment could end up at 10%, a person familiar with her remarks at the summit said. This would hit Europe’s young people particularly hard, according to Lagarde.

Lagarde told leaders that they have the power to shape the economic recovery and that the aid package should be delivered quickly and firmly anchored in economic reforms. These negotiations offer a chance to show that Europe is back, she said.

Italy Says Some Funds Should Be Available This Year (1:55 p.m. Brussels)

Italian Prime Minister Giuseppe Conte, whose country stands to benefit the most from the proposed grants and loans, insisted that an accord must be reached by the end of July, according to an official familiar with his comments. He also welcomed the commission’s efforts to make some of the funds available this year.

Denmark Wants a Deal, But Calls for Changes (1:42 p.m.)

Danish Prime Minister Mette Frederiksen said the recovery fund should be smaller and more clearly targeted at the countries that have been most affected, adding that her government is ready to reach a deal by the summer, according to one official familiar with the discussions. Denmark’s main priority is to maintain its budget rebate and Frederiksen told her colleagues that the commission’s proposal for net contributors needs to be improved.

Traders Would Likely Agree With Lagarde’s Assessment (1:06 p.m. Brussels)

Lagarde’s warning to EU leaders that failure risks market turmoil is a fair assertion for traders. While the ECB is doing its utmost to insulate the economy from a full-blown financial crisis, the euro has gotten its biggest boost from the prospect of the regional recovery fund, surging this month to its highest level versus the dollar since early March.

So that means the risks for Italian bonds are enormous. As the coronavirus ripped through the country earlier this year, its 10-year yield spread over Germany — a key gauge of breakup risk in the region — surged to over 300 basis points, the highest level since 2018. Since then, the premium has narrowed on hopes that the EU is getting ready to issue joint-debt to take the fiscal strain off Europe’s most indebted nations.

The euro and the region’s bond markets were trading broadly steady Friday.

Merkel May Be Trying to Crank Up the Pressure (12:34 p.m. Brussels)

Long-time observers of the chancellor have seen how she tends to play up the risks at start of negotiation in order to frame the outcome that she wants as inevitable. In this instance, it’s the depth of the recession and the other risks crowding in on the EU that she’s using to add urgency to her argument.

In Germany, it’s known as her “no alternative” style of policy making. In the U.K., Margaret Thatcher was famous for using similar tactics.

Macron Stands Firm on Size of Rescue Proposal (12:05 p.m. Brussels)

French President Emmanuel Macron told his EU counterparts that the bloc’s rescue measures should include at least 500 billion euros in grants as a result of the scope of the economic impact of the pandemic, according to an official familiar with the comments. He added that an agreement should be finalized by July because of the sensitivities of the markets and the pressure from Brexit negotiations.

In a sign that Macron is willing to extend some concessions to the fiscally hawkish countries, he signaled he could agree with cash rebates for the biggest contributors to the bloc’s joint budget, as long as this is deemed necessary to get a deal on the recovery plan, the official said.

A government spokesperson declined to comment.

Merkel: Some May Not Understand How Bad Things Are (11:52 a.m. Brussels)

The German chancellor warned her fellow leaders that the EU is facing its deepest recession since World War II and that will lead to very, very difficult times indeed, according to officials familiar with her comments.

She wondered whether people have understood exactly what this means and cautioned that the EU has every interest in having a recovery plan in place by the end of the summer, the officials said. Leaders need to meet in person as soon as possible so that they can seal an agreement, she added.

Lagarde: Stimulus News Had Similar Effect to Monetary Measures (11:30 a.m. Brussels)

Lagarde told EU leaders that the Franco-Germany announcement about an EU-wide recovery plan lowered financing costs by nearly as much as monetary measures, according to officials familiar with her comments.

Lagarde added that any stimulus measures would need to be quick, flexible and anchored in economic reforms, the officials said.

Austria Says Money Must Be Tied to Reforms (11:14 a.m. Brussels)

Austrian Chancellor Sebastian Kurz said EU recovery funds should only be paid out if they help bring about reforms, not if they just boost consumption.

“Are the funds tied to reforms? Do they make us more competitive? Will they go into digitization and ecologization? That’s the right thing to do,” Kurz said. “Or will it be blown off by being spent on ideas like a universal basic income or travel vouchers?”

Kurz said he hoped a deal could be reached at the EU’s next summit in July and that he’s in “close coordination” with European Commission President Ursula von der Leyen, and with a group of other budget hardliners, including Denmark, Sweden and the Netherlands.

Lagarde Warns of Market Risk Without a Deal (11 a.m. Brussels)

European Central Bank President Christine Lagarde warned national leaders that the recent calm in financial markets is in part because investors have priced in action from governments.

Lagarde said that if European Union member states fail to reach an agreement on funding the economic recovery then sentiment could shift, according to officials familiar with her comments on a videoconference.

Leaders are holding their first discussion on the 750 billion-euro package Friday with Germany and France pushing for the deal to be wrapped up by next month.

Von der Leyen Calls for Quick Action From Leaders (10:15 a.m. Brussels)

European Commission President Ursula von der Leyen touted the proposal put before the leaders as an “ambitious and balanced” plan that will help both the nations hurt by the pandemic and those less affected.

But she warned that there’s no time to waste.

“Europe must now invest and reform to get out of the crisis,” von der Leyen said in opening remarks before the summit began. “We must all pull together, we cannot afford any delay.”

(A previous version corrected the spelling of the ECB president in the headline.)

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