By Maartje Wijffelaars, Senior Economist at Rabobank
Crash Averted
It’s been a busy week in Europe, before the start of the holiday season. Heavy meetings in Brussels, monetary policy decisions, and intense peace talks in which Europe is trying hard to get its foot in the door, while Russia—at times aided by the U.S.—continues to slam it shut.
Yesterday, EU leaders have agreed to provide a EUR 90bn loan to Ukraine for 2026-2027. The EU won’t use frozen Russian assets as collateral, but rather borrow money on the capital markets against the headroom in the EU budget. The headroom is the difference between existing budget commitments and the amount EU countries can be called upon to contribute to the budget.
Put simply, this means that if Ukraine fails to repay, EU governments are liable through their contributions to the EU budget. Hungary, Slovakia and Czechia managed to get an opt out from the guarantees, in exchange for not blocking the loan. Leaders agreed that Ukraine would only have to repay the loan if it receives reparation payments from Russia. Absent those payments, Russian assets remain immobilized and the EU could still decide to use the frozen assets to repay the loan. Yet that would still require a majority agreement in the Council, which is as unlikely to gain approval from Belgium and others later as it was now.
Leaders have also stated that Ukraine entrance to the EU is an important part of peace negotiations and that it is important to make progress on that front. Some argue that the EU’s mutual defense clause could provide similar guarantees to NATO’s Article 5, whose relevance has been questioned by the U.S. That said, support EU member states have to lend to a fellow in case of attack “to the best of their ability” arguably not necessarily concerns military aid. Broad agreement on the importance of Ukraine membership, however, doesn’t mean leaders agree Ukraine should be able to enter without fulfilling the legal and institutional requirements that are attached to EU membership – or at all if you ask Hungary’s Orbán. Necessity is the mother of invention, but the process could easily still take years.
In that light, reports that the US, EU allies and Ukraine are getting close to a formal agreement on strong security guarantees for Ukraine are more promising. It would allow for EU boots on the ground at a distance from the frozen frontline, in case of a peace deal. Talks are said to continue today and tomorrow in the US. That said, Russia has so far been unwilling to allow NATO forces on the ground in Ukraine. So it’s highly doubtful that Putin would agree to a deal including forces of individual NATO members being stationed in Ukraine. If anything, Putin made clear this week that the territorial goals of his invasion have not changed and that he wants to pursue those goals either through diplomacy or force.
Meanwhile, the Mercosur deal hasn’t made it to a vote yet. The Commission’s Von der Leyen was supposed to travel to South America this Saturday to sign the deal. But, France, Italy, Poland and Hungary, remained unhappy with the safeguards to protect EU farmers already included and asked for more. The vote has been pushed to January, after Italy’s Meloni called Brazil’s president Lula to ask for a one-month delay at most, to get the deal done. Lula said he would inform Mercosur countries. Earlier this week, Lula stated that the deal is in fact already more beneficial for the EU than the Mercosur block and isn’t interested in adding more safeguards to cap EU imports. So it remains to be seen if agreement can be reached.
Over to the monetary policy meetings. The ECB kept its deposit facility rate at 2% yesterday, as we had expected. They also upwardly revised their inflation and growth outlook for next year and lowered it somewhat for 2027 to (here.
Across the Channel, the BoE cut its interest rate with 25bp to 3.75%. The cut was broadly expected and so was the 5-4 vote. As our UK strategist Stefan Koopman noted beforehand, the labour market is cooling, wage growth is slowing, inflation is finally coming down and fiscal policy will tighten further next year. The MPC repeated that the Bank Rate is “likely to continue on a gradual downward path,” but warned that decisions on further easing will become a “closer call.” Bailey voted in favour of the cut and signalled that he sees scope for further easing, but is explicitly looking for progress in inflation expectations and in forward-looking wage indicators. So that's something to watch out for in the months ahead, Stefan Koopman notes. He expects two 25bp cuts in 2026, one in February and one in April, while acknowledging that decisions to move remain highly data-dependent. For more insights please see his Banxico lowered its overnight policy rate by 25bp to 7% as we had projected. Philip Marey expects a cut in March, June and September next year, as Trump’s influence over the Fed grows.