Russia Keeps Slamming The Door In Europe's Face

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 (partially?) correct for the delay of ETS2 from 2027 to 2028.

With respect to growth, Lagarde stressed that the economy has been resilient so far and that trade tensions have eased. At the same time, however, she argued that the international environment is still volatile and that weak external demand will be a drag on growth. Instead, consumption should support the economy and "business investment and substantial govt investments should increasingly underpin the economy." This matches our own view as we’ve laid out in this week’s Eurozone 2026 outlook piece, although we are somewhat less optimistic than the ECB. We project growth to come in at 0.9% next year and 1.2% in 2027, compared to the ECB’s forecast of 1.2% and 1.4%, respectively.

As for guidance, the ECB reiterated that its data-dependent and will determine its rate action meeting-by-meeting. According to our forecasts this means that the ECB is likely to keep rates on hold in the coming year and will hike twice in 2027, in March and June. For a thorough assessment of yesterday’s announcements and outlook, please see Bas van Geffen’s take 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 post-meeting comment.

Other monetary policy announcements came from the Norges Bank, Riksbank, Banxico and the Bank of Japan. Norges Bank and Riksbank kept their interest rate constant, as expected, while Banxico lowered its overnight policy rate by 25bp to 7% as we had projected. Our Mexico strategist see at least two more 25bp cuts from Banxico in 2026. The BoJ hiked its policy rate to 0.75%, which is low in international comparison, but the highest level in three decades. Its 10-year yield also reached multi-decade highs at 2%.

At the other side of the Atlantic, November’s CPI print in the US supported rate cut bets, stocks and bonds. Both headline and core CPI came in 0.4pp lower than expected at 2.7%y/y and 2.6% y/y, respectively, down from 3% in September. There is no figure published for October due to lacking survey input. But as we understand it, the shutdown has also influenced the November figure due to the measures used to correct for missing October data. This suggests shelter inflation, for example, is underestimated. Nevertheless, investors embraced the soft print, with the S&P 500 up 0.8% for example, although it is still down 0.8% on the week. A cut by April is now over 90% priced in. Recall that our Fed watcher Philip Marey expects a cut in March, June and September next year, as Trump’s influence over the Fed grows.