Amis (Richard Coyle): “The agreement between gentlemen presumes a gentleman involved.”

The quote is taken from “An excellent vintage” movie directed by Ridley Scott, in 2006.

To make a “gentlemen agreement”, a gentleman must be “in the middle”. It could become complicated when the heads of state and government of 27 nations need to sit at the negotiating table to find an agreement on a Fund for the Recovery. But, it seems those were gentlemen - or at least reasonable people - because finally, last week, after days of long negotiations, an agreement was reached. And it was far from an obvious result, since the initial divergencies between the members of the European Union were severe, with the so-called frugal countries - the Netherlands, Sweden, Denmark, Austria and Finland - who wanted to place strong restrictions on the access to the resources.

The agreement established that to finance significantly the countries most affected by the pandemic, the European Commission will be able to issue common debt on the markets. We are talking about an important step in the history of Europe because it will create for the first time an actual Common Public Debt. The total appropriations will be equal to 750 billion euros and the resources will be disbursed in two ways: 390 billion will be distributed in the form of grants, while 360 billion will be loans. In terms of timing, the funds will be distributed between 2021 and 2023 (which we hope will be, in line with the title of Ridley Scott’s film, excellent vintages), and the Fund will remain alive until 2026. The repayment of the loans will begin in 2027.

The European Union will be able to exercise some form of control, even if the proposal made by the frugal nations, regarding a veto on expenses, has been rejected. To receive the funds, it will be necessary to present a Reform Plan, which will need the approval of the European Commission and the European Council, by a qualified majority. Besides, a potential temporary suspension of payments is foreseen in case of a suspected breach of the agreements.

From a macro point of view, in Germany the Ifo index (which measures the morale of German companies) was equal to 90.5 points in July, increasing from the 86.2 of the previous month and beyond the consensus of economists (89.3 points). The president of the Ifo institute, Clemens Fuest, underlined that the companies sentiment is consistently improving since this is the third consecutive month in which there is an increase. Also, he said that “the German Economy is recovering step by step”.

Meanwhile, turning to geopolitics, tensions are rising again between the United States and China, other than an agreement between gentlemen in this case. The markets, worried about a possible escalation, monitor the situation carefully. On Monday morning, the Chinese Government regained possession of the American consulate in Chengdu, vacated by US diplomats. This gesture represents the response of the People’s Republic to what happened to its consulate in Houston, recently closed due to the accusations of industrial and technological espionage brought by the States. Last Thursday, the American Secretary of State, Mike Pompeo, gave a very critical speech towards Beijing, pitting the “free world” against the Chinese Communist Party. The People’s Republic has rejected all accusations and, according to regime media, the United States is bringing relations “to the point of hysteria”. So far, however, Beijing’s reaction has been contained and proportional: it is not in the government’s interest to further tighten relations with the United States. Then it remains to be seen what will happen after the American presidential election in November.

On a macro level, durable goods orders in the United States continued to grow in June. According to the Department of Commerce (Bureau of the Census), the data showed an in- crease of 7.3%, which follows the + 15.1% of the previous month (data revised from + 15.8%). The result beat analyst estimates, which is an increase of 7.2%. The “core” figure, i.e. net of orders from the transport sector, marked an increase of 3.3% compared to +3.6% in the previous month and +3.5% of the consensus. On the other hand, if the defense sector is excluded, the figure is up 9.2% after a + 15.2% in May.