The Surrender of . Diego Velázquez, 1635. Prado Museum. HOUSE VIEW JUNE 2020 THE EU RECOVERY FUND: THE SURRENDER OF BREDA? HOUSE VIEW. JUNE 2020

The proposed European rescue plan is excellent news for Europe and has triggered a sigh of relief among Southern European governments. The European Commission has issued a proposal for a Multiannual Financial Framework debt worth 750 billion euros, 500 billion of which will be paid out in non-repayable grants. The proposal, born out of France and Germany’s resolve to begin distributing non-repayable grants, has got the countries of the European south – the hardest hit by Covid-19 – rubbing their hands with glee: 75 billion euros in grants for (6.2% of GDP), 82 billion for , 16 billion for Portugal and 22 billion for Greece. There will also be an additional 250 billion euros available in loans, of which 60% will be allocated to Italy and Spain.

1. GRANTS 2. DISTRIBUTION OF LOANS Source: European Commission and Banca March Source: European Commission and Banca March

90 12% 80 Others 10% Italy 70 35% r 36% u

E 60 8%

M 50 6% 0 40 0 0

1 30 4%

x 20 2% 10 0%

Italy Greece Spain France Greece Poland 4% Spain Portugal Germany 25% Amount % GDP (right)

the , Austria, Sweden and Denmark – this proposal is outstanding news and already enjoys Germany’s in Breda of the Spanish military unit known as the , captained by Spínola, against the forces of the United those who will foot the bill for the plan?

imbalances and the tough years that lie ahead, the EC’s strategy is clear: to roll out a European reconstruction plan needed in response to the problem, with the impact of the funding diluted over time. The bill will paid gradually, over 30 years, as of 2028, and will be partly covered by taxes levied on the companies that generate the most

Naturally, funding the project requires the backing of the countries set to contribute the most, which are positioned they put in.

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3. BENEFICIARIES VS. CONTRIBUTORS IN % OF GDP Source: European Commission and Banca March

25% 20% 15% 10% 5% 0% -5% -10% -15% -20% ES IT PL EL PT DK BE AT IE SE NL FR DE % Non-reimbursable transfer % GDP UE 27 Di erence

This asymmetry when it comes to footing the bill will mean, without a doubt, that at the next meeting of the therefore be considered an upside proposal, but the foundations for the stimulus have already been laid.

It will be months before the instrument sees the light of day, as it needs unanimous backing from Heads of State and the European Parliament followed by validation at the Member State level. What’s more, the money will take time to arrive; in the best case scenario, the funds will start being paid out early next year, and half of the non-repayable grants will be transferred in 2023 and 2024. In the end, they are going to help us, and with great generosity too (Graph 4). electoral gains, these stimulus measures will be subject to certain conditions. The clearest evidence of this is the fact that the payments will be staggered over years, and will be subject to reforms and investments: each government will have to justify how it plans to meet the targets set. The environmental and digital transitions will account for the largest share of the budget and, as shown by Graph 4, will represent at least a quarter of the proportion of the remaining 77% will also likely be channelled into these targets.

4. PAYMENT SCHEDULE 5. DISTRIBUTION OF MULTIANNUAL FINANCIAL PLAN Source: European Commission and Banca March Source: European Commission and Banca March

InvestEU Recovery and Resilience Facility and Connect Cohesion Europe Fund and 30% 2% ERDF 6% CAP 7% 25% LIFE and Just Transition Fund 20% 2% 2021 -2027 (MFF) Horizon Financial Plan Europe 15% €1.85 trillion 5%

10% InvestEU, Connect Europe and Digital 5% €1.02 trillion Europe Programme 2014-2020 1% Financial Plan 0% 2021 2022 2023 2024 2025 2026 2027 Green investment Subsidies Loans Others 77% Digital investment

THE EU RECOVERY FUND: THE SURRENDER OF BREDA? 3 HOUSE VIEW. JUNE 2020

Just as Spain celebrated the victory of Philip IV, King of Spain, in 1625, so we will now celebrate the expected stimulus measures that are en route to help us overcome the damage wrought by Covid-19. We must never forget that what matters is not winning the battle; it is winning the war. Breda may have fallen, but in the end, we lost the Battle of Flanders. Solidarity from the North will not be enough to get us through this ordeal. Like Spínola,

An opportunity of paramount importance lies before us. We must not squander it.

You can gain a deeper insight into our macro and asset outlooks in this month’s House View, where we explain that despite rising asset prices fuelled by abundant stimulus measures, we recommend staying our course: holding equities and building exposure to credit.

Joan Bonet Majó Chief Investment Strategist

THE EU RECOVERY FUND: THE SURRENDER OF BREDA? 4 HOUSE VIEW. JUNE 2020

IMPORTANT REMARK:

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relation with the information shown in this document. All terms, conditions and prices contained in this document

issues or any other type of information required. Banca March, S.A.. does not assume any responsibility for any direct or indirect costs or loss which may result from the use of this document or its contents. No part of this document can be copied, photocopied or duplicated in any way or through any means, redistributed or quoted without a previous written authorisation by Banca March, S.A.

THE EU RECOVERY FUND: THE SURRENDER OF BREDA? 5