The EU Mini-Summit takes the World Stage

This evening, EU leaders will gather in Brussels for an informal dinner. The agenda is on jobs and growth to prepare a growth pact to be agreed on at the June 28/29 EU-Summit. More specifically, there are three main proposals. First, a €10 billion increase in capital for the European Investment Bank (EIB) for infrastructure projects. That would increase its leverage and could eventually release up to €180B for investment in infrastructure. Second, redirecting EU structural funds to other areas where it might reap more immediate growth rewards. On a third proposal, namely the issuance of project bonds, is already reached an agreement with the EU Parliament. The project bonds will be used to fund pan-European infrastructure projects. A pilot programme, using €230M EU Capital, will run until 2013 and if successful could lead to up to €4.6B of new investment. Apart from these three items, EU President Van Rompuy pushed for an open debate (“no taboos”) concerning the longer term perspective. In this perspective, the idea of the creation of Eurobonds is put back on the table by French President Hollande with the backing of amongst others Spanish PM Rajoy and Italian PM Monti. Yesterday, also the OECD and the IMF backed his call.

However, Germany and Austria already countered the proposal by saying that the issuance of common debt should come with the creation of a fiscal union. So, despite the “show” of unity, the respective positions of the two sides still look to be virtually immiscible. Other points that might be discussed are delaying the fiscal targets for some EMU countries and the possibility of allowing the ESM to lend directly to banks and the possibility of granting the ESM a banking license. Changing the ESM to allow it to lend directly to the banks would represent a fundamental change in the euro zone’s approach to the crisis. The other option, giving the ESM a banking license, is also an option that Germany will probably even not contemplate discussing. Sources said that there will be no official press statement after the meeting.

Regarding trading, Asian equities are trading weak. Disappointment that the BOJ stayed on hold is one reason, but some rumors about an eventual preparation of Greece leaving the euro are more important. DJ is the source of the rumor, but a CNBC report seems to deny it. Former Greek PM Papademos should have said that, while such preparations are not being made in Greece, he couldn’t exclude that elsewhere such preparations were considered, even if he thought it unlikely. Whatever, it shows the uncertainties and nervousness in the market. Today, attention will go to the Summit dinner, which takes place after European closure and no statement is expected. The German Bund opened this morning at levels reached in yesterday’s aftermarket trading (ie higher than the official close). Today, the eco calendar is once again negligible and volatility and sentiment will likely drive trading again. The Schatz auction (0% coupon) will likely get a lot of media attention but we think it will go well

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