EU set to propose 750bn euro reconstruction fund

Brussels will propose a €750bn reconstruction fund on Wednesday evening financed through jointly-issued debt, the majority of which will be disbursed as grants.

When combined with other EU funds, as announced later in the day, that took the projected amount of the bloc's "revamped long-term EU budget" to €1.85trn.

Erik Nielsen, chief economist at Unicredit, labelled the underlying plans put forth by French President Emanuel Macron and German Chancellor as "crossing the Rubicon", especially in the case of the latter.

In a research note sent to clients on 24 May, Nielsen also highlighted support for her plans from "her party, several leading newspapers and a majority of Germans."

Analysts at Barclays Research were in a similar frame of mind, having said on 22 May that: "Notwithstanding the temporary and targeted nature of such a mechanism, we believe that it is breaking a taboo."

Citing an official familiar with the plan, Bloomberg reported that €500bn of the total amount of those funds would go towards grants while the remainder would be provided through loans.

The financing of those monies would be provided by debt issued through the European Commission.

Nevertheless, any proposal would first need to obtain the approval of the European Council and the European Parliament, Barclays pointed out.

Two weeks before, the EP had voted in favour of a proposed €2trn fund financed via debt, among other things, which was a bit more than what was finally put on the table.

Barclays also noted the delicate negotiations that would need to take place in the weeks and months ahead, including the potential objections from some Eastern European countries worried that funds earmarked form them could be diverted to the south.

"A compromise will likely be complicated, and we do not think an agreement will be possible at the June EU Summit," Barclays said.

"Discussions are more likely to drag on after the summer, and end up being managed by the German EU presidency, which starts on 1 July."

Longer-term Italian government notes found a bid on the back of the announcement, pushing the yield at the 10-year tenor down by seven basis points to 1.48%.