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The warning comes from Dr Giovanni Di Lieto, an international trade expert from the University of Monash, Australia, who told Express.co.uk the European Union is in for its worst-case scenario if they refuse to strike a Brexit deal with the UK at the end of the year. Dr Di Lieto stressed that whilst both parties would benefit from a trade deal, the EU will be the one suffering the most from failing to reach an agreement as the coronavirus crisis will have prevented Frankfurt, Berlin, or other European capitals to replace London’s financial power. He explained: “The EU will feel the full brunt of the UK leaving the bloc. Of course, that goes also for the UK because the EU is more important than the UK’s economy than the other way around.
“But for the European Union the worst case scenario, the worst that can happen, with a no deal Brexit is that there will be further uncertainty for businesses.
“Especially at a time when they will be scrambling for more secure investments and a business climate that provides for the conditions to rebound from the coronavirus crisis.
“And also, purely on a financial level, the European Union doesn’t seem quite ready to entirely replace London as the financial capital of the European region.
“Frankfurt to a point, Paris has been trying really hard and even Amsterdam, but I don’t think that they can because of the whole uncertainty and somewhat delusion of trying to find agreement between the EU and the UK.
“I think the EU will suffer particularly on a financial level. Even more so now, because there’s going to be so much more money this year and next year because of the pandemic in terms of the capital. There will be a glut of capital at a very low cost that’s been issued.”
He added: “We shouldn’t forget that the UK, even if we have no deal next year, the UK economy is still even just geographically so integrated with the rest of Europe and that won’t go away.”
The warning comes as trade talks between the EU chief negotiator Michel Barnier and his UK counterpart David Frost continue to sour.
Meanwhile, Italian 10-year government bond yields were on course for their biggest weekly fall in eight weeks after a European Union proposal tabled by Emmanuel Macron and Angela Merkel for a recovery fund that could provide grants to help the highly indebted country’s coronavirus-hit economy.
Bond investors had hoped for some form of EU joint effort to tackle the costs of fighting the coronavirus pandemic because financing for the proposed fund would not count towards Italy’s already hefty debt burden.
The proposal helped to push Italy’s 10-year bond yield down 25 basis points this week, its largest weekly fall in eight weeks.
“The proposal as it stands is unambiguously positive for the BTP market. It’s good for peripherals, in some ways it’s good for banks, but let’s see what the details are,” said Invesco macro analyst Mark McDonnell.
“The market must be optimistic, but I think there is a little bit of concern priced in there as well. We’ve been here before and it’s not going to be easy to get everyone on board.”
However, the idea of grants has been slammed down by the EU’s self-styled “frugal four” which includes Austria, Sweden, Denmark and the Netherlands who suggested loans instead.
The four countries generally oppose big spending and fear the proposal will lead to a mutualisation of member states’ debt.
“I believe this is a very deep transformation and that’s what the European Union and the single market needed to remain coherent. It’s what the euro zone needs to remain united.
“We propose to create an Emergency Recovery Fund based on a ‘loans for loans’ approach,” the four countries said in a so-called “non-paper” outlining their position to other member states and released by Austria.”
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The “frugal-four” countries produced a two-page document which listed principles they wanted the fund to adhere to.
This included “not leading to any mutualisation of debt” and that it be of a “temporary, one-off nature with an explicit sunset clause after two years”.
But the document from the “frugal four” said the Commission predicts member states will suffer an “unprecedented economic contraction in 2020, with only a partial recovery in 2021”.
The four nations said in the document: “Additional funds for the EU, regardless of how they are financed, will strain national budgets even further.”
Austrian Chancellor Sebastian Kurz said his country would submit a counterproposal along with the Netherlands, Denmark and Sweden that would be based on loans, not grants, and avoid common borrowing.
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