Brussels Edition: Of Barbarians and Brexit

(Bloomberg) -- Welcome to the Brussels Edition, Bloomberg’s daily briefing on what matters most in the heart of the European Union.

After the brief debate over the terms of the U.K.'s departure ended yesterday, EU leaders got back to the usual business of being at each other's throats. After fighting about expansion to the Balkans, today they'll clash over the transition to carbon neutrality and the bloc's trillion-euro budget. Brexit has been the one area where Europe could maintain a facade of unity -- and even brag about it. As the greatest of Greek poets put it: “And now, what’s going to happen to us without barbarians? They were, those people, a kind of solution.”

What’s Happening

Size Matters | With Brexit out of the way (for now), leaders will have to discuss the EU’s next multi-year budget. Determining its size is crucial before they can decide how funds will be allocated. One EU diplomat summed it up like this: if you don’t know the size of the cake you can’t decide how to cut it. Don’t hold your breath for a decision just yet. 

Poland’s Price | EU leaders will position themselves today before a decisive battle on climate neutrality at the next summit. Poland holds a veto and has signaled that its support isn’t going to come cheap. It stopped short of naming a price but warned that the existing financial instruments are not sufficient to reach net-zero emissions.

ECB Future | Mario Draghi is less than a week away from his final ECB policy meeting, but his legacy looks set to last far longer. Bloomberg's survey of economists shows they reckon he's locked in his ultra-loose policy for the next three years. His successor, Christine Lagarde, will still have plenty on her plate: She’s seen as likely to start a wholesale review of ECB strategy — and to try to persuade governments such as Germany's to ramp up spending to spur the economy.

Seeking Growth | Brexit isn’t just dominating talks in Brussels and London. The EU’s top economic policymakers, in Washington today for the IMF’s fall meeting, will think about the potential impact of the U.K.’s divorce from the EU, amid trade tensions and a declining growth outlook. The key theme already emerging is that governments should spend to support growth. 

Week Ahead | Turkey, which for months has drawn extra attention at NATO meetings for pursuing a Russian missile system, may do so again when the alliance’s defense ministers gather on Oct. 24-25 in Brussels. The reason this time: Turkey's equally controversial military operation in Syria.

In Case You Missed It

Final Hurdle | Boris Johnson’s Brexit deal with the EU was barely agreed before it ran into trouble at home, as his Northern Irish allies said they could not support it. While the deal sorted one key piece of the Brexit puzzle, Johnson still needs to get the agreement through the House of Commons tomorrow, and the arithmetic is looking very tricky. 

Inflation Absurdity | With a new era of stimulus beginning and critics railing against central banks for their impotence, the question of how to calculate inflation is a crucial part of the debate. Here’s how a trendy corner of Madrid lays bare the flaw in Europe’s inflation calculation. 

German Slump | Angela Merkel’s government cut its 2020 growth forecast as Europe’s biggest economy braces for waning global demand, Brexit and trade disputes to carry into next year. The lowered outlook may further speed up stimulus discussions, as it will make balanced-budget targets harder to hit. 

Catalan Challenge | Catalonia’s separatist president pledged a new push for independence, challenging the Spanish government after a week that’s seen violent street protests against the jail terms handed to pro-independence leaders. The scale and violence of the demonstrations this week could present a severe challenge to acting Prime Minister Pedro Sanchez ahead of elections.

Chart of the Day

As the third-quarter earnings season kicks off in earnest this week for U.S. banks, European lenders may struggle to surpass the gains of their peers, in a pattern evident since the financial crisis. This year’s underperformance of 18% illustrates the consistently unfavorable outlook for European banks, including low yields, weak profitability and high consolidation hurdles. Analysts remain cautious in such an environment.

Today’s Agenda

All times CET.

• EU leaders continue two-day summit in Brussels

• World Bank and the International Monetary Fund hold fall meeting in Washington

• Bank of Italy quarterly economic bulletin

--With assistance from Jonathan Stearns and Paul Gordon.

To contact the editor responsible for this story: Emma Ross-Thomas at erossthomas@bloomberg.net, Chad Thomas

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