• EU leaders are holding a video conference on how to mitigate the coronavirus crisis.
  • Southern countries are demanding coronabonds and a large aid package.
  • Several northern countries refuse to share the debt.
  • EUR/USD will likely move on any decision that may be fateful to the project. 

"Repugnant!" cried Portugal's Prime Minister António Costa in an angry exchange with European colleagues about the economic response to coronavirus. He responded to Wopke Hoekstra, the Dutch finance minister, who suggested the EU should investigate countries like Spain that have no budgetary margin to deal with the crisis after seven years of growth. 

While that lively debate may have been the extreme expression of the bloc's divisions, the issues are significant and threaten to wreck the EU apart. France, Italy, Spain, and several other countries have called for issuing common European bonds – dubbed "coronabonds" – while the Netherlands and Germany oppose it. 

So far, the Eurogroup agreed to provide a package worth €500 billion of mostly loans. It took several feisty meetings and the compromise was that countries could use the ESM bailout mechanism, yet without conditions usually attached to such help as Greece, Portugal and Ireland were forced to swallow in the debt crisis. Italy wanted to refrain from the stigma related to rescue packages. 

That deal left many countries frustrated and anger is simmering. Investors have sold Italian bonds, widening the spread between them and benchmark German bunds, weighing on the value of the euro. The upcoming summit is a chance to bring the project together or potentially sow the seeds for further disagreement.

North-south divide

French President Emmanuel Macron – who was trying to compromise in the previous round – told the Financial Times that the EU risks collapse unless it supports stricken economies such as Italy and said that punishing the "sinners" may have consequences. 

Spain, which is usually quiet on European matters, has raised its profile as well. Prime Minister Pedro Sánchez stressed that as the virus has no borders, so should European solidarity and added that even europhile Spain needed real proof of commitment. Spain has recently suggested a plan worth €1.5 trillion, and it received support from several officials in Brussels, such as Frans Timmermans, the Executive Vice President of the European Commission. 

His Italian counterpart Giuseppe Conte also warned that the project is at risk if the EU does seize the opportunity to put new life, and added that the risk of failure is real.

Germany and the Netherlands would not like to make their citizens liable for other countries' borrowings and are back by the supportive public. Citizens in these countries believe they have been charitable to their peers and that sharing debt is or enlarging any other aid package would go too far.

In the meantime, governments have taken solitary actions, sometimes violating EU state aid rules. After a hesitant start, the European Central Bank announced a new bond-buying scheme – on top of previous ones – worth €750 billion.

The ECB's Pandemic Emergency Purchase Program (PEPP) carries fewer self-imposed limits in comparison to existing plans and has helped stabilize markets. However, Citigroup analysts assessed it would run out of money by October. In the meantime, it is unable to fully hold Italian yields from rising and it probably makes some governments think twice before announcing new stimulus. 

Letting the economies fall or boosting them rests with politicians. The EU Summit on April 23 – and potentially following ones – can go three ways that may impact EUR/USD very differently. 

1) Another euro-fudge

All-night EU summits often end with a compromise. Under growing pressure, Merkel may opt for backing a broader EU fund, perhaps something between €750 billion to €1 trillion, potentially with no or limited conditions attached. That would be an improvement to the previous deal but insufficient given the magnitude of the crisis. It would not be a big bazooka.

In that case, EUR/USD may initially rise in response to optimism, but decline, as it markets, would see that as insufficient and send it down. Euro-fudges and kicking the can down the road are common practices, so this scenario has a high probability.

2) No agreement

Southern countries are feeling the heat from populist political rivals at home and struggling economies. They may feel emboldened to leave the summit and following the ones in anger. Northern countries may also feel there is no way forward. The wide divide means that such a case has medium probability despite the dire times requiring cooperation.

In that case, EUR/USD would have substantial room to the downside. If time passes by and further summits end in failure, the path to EUR/USD parity is open. Fears of the eurozone exit – this time not by a small member like Greece but a critical one like Italy – would send peripheral bonds and the common currency down.

3) Coronabonds or a massive bazooka

If EU leaders grasp the opportunity and go for closer integration via mutualizing debt – the union would strengthen and the euro would surge. Even without coronabonds, just adopting the Spanish plan of €1.5 trillion would be sufficient as a bazooka to thwart investors from selling debt. Governments would be able to deploy funds to stimulate economies as they open up.

This scenario of a leap in the euro has low probability given the recent rhetoric, but cannot be ruled out. Perhaps the fudge could turn into a creative idea that would please everybody. 

Conclusion 

The coronavirus crisis has exposed the north-south divide in the eurozone and aims to bring it down. Another compromise would eventually weigh on the euro and has high chances. An inconclusive summit could send EUR/USD tumbling, perhaps to parity, while a powerful plan would send it higher. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD recovers above 1.0150 as dollar loses strength

EUR/USD recovers above 1.0150 as dollar loses strength

EUR/USD staged a rebound in the second half of the day and turned positive above 1.0160. The disappointing Housing Starts data from the US caused the dollar rally to lose its stream and helped the pair erase its losses. The cautious mood, however, limits EUR/USD's upside. 

EUR/USD News

GBP/USD gains traction, rises toward 1.2100

GBP/USD gains traction, rises toward 1.2100

GBP/USD has turned north during the American trading hours and climbed toward the 1.2100 area. The dollar lost its strength after the US data showed a significant decline in Housing Starts in July and the US Dollar Index retreated from multi-week highs toward 106.50.

GBP/USD News

Gold stays below $1,780 as US yields push higher

Gold stays below $1,780 as US yields push higher

Gold came under renewed bearish pressure in the early American session and dropped toward $1,770. The benchmark 10-year US Treasury bond yield is up more than 2% on the day above 2.8%, not allowing XAU/USD to capitalize on renewed dollar weakness.

Gold News

Three reasons why meme coins Dogecoin and Shiba Inu are hot again

Three reasons why meme coins Dogecoin and Shiba Inu are hot again

Dogecoin and Shiba Inu prices break into a rally, offering holders gains. Dogecoin offered holders 16% gains over the past week, and competitor Shiba Inu yielded 30% profits.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

Majors

Cryptocurrencies

Signatures