European Union leaders will press for new efforts to boost economic growth and improve lending conditions when they meet later this month, according to a draft document prepared for a June 28-29 summit in Brussels.
The 27-nation bloc will pursue growth measures at a time when, in the words of European Central Bank President Mario Draghi, “there is no inflation risk in any European country” and the ECB will continue to provide liquidity to the banking system. Draghi is working with EU President Herman Van Rompuy, Luxembourg’s Jean-Claude Juncker and European Commission President Jose Barroso on a blueprint for further integration of the 17-nation euro region.
This report will set out building blocks for strengthening the euro area and economic coordination in the broader EU, according to the draft summit document. “Recent developments” have shown the need to take monetary union “to a further stage,” according to the draft dated June 12, which was obtained by Bloomberg News.
Leaders will call for “more specific building blocks” to link budget and banking policies among the 17 nations that use the euro, along with stronger governance of the shared currency. Euro-area nations will meet after the full EU meeting, according to the document.
The heads of state and government “will call for further urgent measures aimed at boosting growth and jobs in Europe and enhancing the financing of the economy in the short to medium term,” according to the draft. These steps include introducing so-called project bonds, making better use of EU infrastructure funds and increasing the capital, and therefore lending power, of the European Investment Bank. The leaders also expect new proposals in the autumn for expanding trade within the EU’s common market.
The EU’s efforts to rein in budget deficits, shore up banks and build a crisis-fighting firewall have not been able to quell financial turmoil, EU Economic and Monetary Affairs Commissioner Olli Rehn said today.
“These actions have contained the crisis - but not tamed it, not to speak of overcoming it,” Rehn said in the text of a speech to a Goldman Sachs Group Inc. conference in Brussels. He said further efforts to shore up the euro area could include a move toward banking union and more budget coordination, so that countries can consider pooling debt.
“In the financial circles, few doubt that it makes economic sense to create a deep, liquid and stable market for government bonds with the joint issuance of public debt,” Rehn said. “But this process has to provide an answer to the concerns about moral hazard, or a possible free-riding on the budgetary prudence and economic strength of others.”
For the Brussels summit to calm markets, it will need to give a “clear sense” of where these initiatives are heading, in terms of process, timing and goals, David Mackie, chief European economist at JPMorgan Chase & Co., said in a research note today.
“If that summit were to deliver a credible road-map to a fiscal and banking union, it could lower borrowing costs for the periphery, as debt restructuring and break-up risks were reduced, and pave the way to a different fiscal objective, focusing on deficits rather than debt, and a much easier monetary stance,” Mackie said.
Spain’s downgrade this week has brought the nation within a hair of junk status and risks triggering contagion in Italy and beyond should investors shun the bonds of the euro area’s fourth-biggest economy.
The yield on Spain’s benchmark 10-year bond was at 6.88 percent at 12:24 p.m. in Madrid. It reached a euro-era record 6.92 percent yesterday after Moody’s Investors Service slashed the country’s rating three levels to Baa3, one step above junk. Investors demanded 5.33 percent more to hold Spanish 10-year debt than that of Germany, with which it shared an AAA rating as recently as September 2010.
Leaders at the June 28-29 summit are also set to endorse the European Commission’s recommendations on national governments’ budget, employment and other economic policies, according to the draft document. Countries must keep cutting budget deficits in a way that supports growth, while making efforts to revive lending and tackle unemployment, according to the paper.
The summit will start with a discussion on Europe’s 2014-2020 budget planning with the European Parliament, a process that aims to wrap up this year. The leaders also will call for stronger efforts to promote trade, improve tax collection and fight tax evasion.