EU pandemic recovery fund approval buoys chems, concerns remain over size, conditions

Author: Tom Brown

2020/07/21

LONDON (ICIS)--EU chemicals stocks rallied on Tuesday in line with wider markets after heads of state and government agreed a €750bn pandemic recovery package.

Concerns remain over delays until the funding is accessible, however, and whether the stimulus is proportionate to the economic collapse caused by the pandemic.

After a marathon negotiating period lasting several days, policymakers from across the 27-country union agreed to the terms of a stimulus package to drive Europe’s economic rebound after the once-in-a-generation economic collapse in the first half of 2020.

Under the terms of the deal, EU member states have brokered a total of €750m in stimulus funding, with €390bn in grants and €360bn in loans, after a bloc of northern states pushed for plans for €500bn in grants to be diluted.

The framework stipulates that the money be put to work quickly to speed the economic rebound, with 70% of the funding to be committed in 2021 and 2022.

The remainder to be committed by the end of 2023.

Borrowing ceilings will be lifted by 0.6 points to cover all EU liabilities resulting from borrowing to address the consequences of the pandemic until those liabilities are cleared or the year 2058 ends.

SPEED OF RESPONSE
The front-loading of the stimulus investment is intended to tighten the recovery from a U-shape to a V-shape but, despite the size of the spending envisaged, the response may still be small compared to the extent of the economic losses this year, according to analysts at banking group ING.

“Is this the most effective recovery fund and budget possible? No, it isn’t. In terms of size, the fund is still relatively small given the severity of the economic crisis,” said ING's senior eurozone economist Bert Colijn.

Despite the planned alacrity for the EU to tap capital markets and for member states to begin spending, the immediacy and extent of the crisis this year and the fact that none of the cash will likely be accessible before next year means that the impact is unlikely to be seen until a year from now.

“The fund will only become effective on 1 January, with the first money probably reaching the real economy not much before mid-2021," added Colijn.

"On top of that, there have been cuts to the original proposal on long-term investment funding such as research and development, digitisation, greening and health."

Analysts at Deutsche Bank in contrast attacked the “short-termist” approach of the deal, with insufficient attention paid to improving the EU’s long-term competitiveness.

Together with the pandemic recovery fund, EU leaders also agreed on the multiannual financial framework (MFF), the 2021-2027 EU budget, at €1,074bn.

“Final agreement on the MFF has shown that once again protection of the status quo has prevailed over the need to focus on the future," said Deutsche Bank senior economist Kevin Koerner.

"This makes the deal more short-termist, less focused on the long term and suboptimal when it comes to the union’s long-term competitiveness."

GREEN STIMULUS
A strong focus of the package is on green and sustainability measures as a means of catalysing economic growth, with a significant portion of the funding earmarked for investment in decarbonisation schemes.

Managers of European chemicals companies are expecting to benefit from the windfall, with the funding expected to unlock hundreds of billions of euros of investment in sustainability projects, according to a roundtable hosted by Credit Suisse last month.

Around 30% of the funding is intended to go into climate-related investments.

All players at the talk expected the recovery package to drive an increase in sales although, despite the precariousness of current financial conditions, that uplift is not expected to make itself fully felt for 12-18 months.

Specifics on the stimulus spending, and what proportion will be equity and what will be loans, are still to be fully announced, but €91bn of expected to be earmarked for retrofitting buildings with better insulation or rooftop solar arrays.

Also on the docket are €25bn in renewable energy tenders and €20bn/year in grants and guarantees on clean transport over the next two years.

The chemicals sector is also at the heart of a planned push in the stimulus on clean hydrogen power as a means of decarbonising the EU power sector, particularly for energy-intensive industries, expected to cost €5bn-9bn to reach up to 1m tonnes/year of renewable hydrogen production by 2024.

“Climate-friendly hydrogen is one of the proven pathways to help achieve the 2050 climate neutrality objective,” said Cefic director general Marco Mensink earlier this month.

“Using hydrogen as a feedstock is a viable option for our industry to reduce CO2 [carbon dioxide] emissions further.”

Economists at German think tank Zew applauded the “frugal four” – Austria, Denmark, Sweden and the Netherlands, which pushed for less ambitious bloc spending – for pushing for a greater proportion of loans to grants in the package, but warned that the package could delay reforms for some countries.

“Despite all this progress, we should not delude ourselves. The lack of competitiveness and low growth prospects in countries like Italy cannot be solved with transfers and loans from Brussels,” said Zew's research department head Friedrich Heinemann.

“Only comprehensive reforms of labour markets, public administration and the education and innovation system will help. A major risk is that the short-term financial boon by the EU blessing will now even prolong the reform backlog,” he added.

Negotiations over the course of the pandemic have highlighted the depth of fault lines between the north and south of the union, with Mediterranean country leaders pushing for greater EU-wide rescue funding and for measures such as eurobonds to reduce their borrowing costs.

That stance has consistently been rebuffed by Germany and the Netherlands.

Europe's Stoxx 600 chemicals index was trading up a little over 1% as of 12:04 London time.

Germany’s main stock DAX and France’s CAC 40 rallied 1.96% and 1.38% respectively.

Italy and Spain's main stock exchanges were up over 2%.

Front page picture: French President Emmanuel Macron and German Chancellor Angela Merkel prepare to address a press conference in Brussels earlier on Tuesday
Source: John Thys/AP/Shutterstock

Focus article by Tom Brown