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EU Seen Agreeing on Project Bonds—Not Eurobonds

European leaders meet in Brussels this evening for an informal dinner being billed as a showdown between German Chancellor Angela Merkel and French President Francois Hollande over the tricky issue of Eurobonds — bonds issued by the European Union and backed by euro zone members collectively.

European Bank Note
Sabine Scheckel | Image Bank | Getty Images
European Bank Note

Those hoping for any agreement on an EU-wide bond issue are likely to be disappointed with leaders, who are far more likely to issue a statement on issuing so-called project bonds to fund infrastructure investment, according to economists at Barclays Research.

“While all German political parties remain opposed to ‘classical’ Eurobonds and to common debt issuance for all purposes, in our view, the German SPD and Green parties would favor some conditionality/sharing of fiscal policy via a more narrow definition of Eurobonds,” said Julian Callow, the chief European economist at Barclays, in a research note ahead of the meeting in Brussels.

Merkel’s CDU party is not ready to accept even a narrow definition of Eurobonds, according to Callow, but could be ready to back project bonds in unison with extra funding for the European Investment Bank.

“We would expect some progress to be made towards raising the EIB’s capital and on the pilot program for project bonds.

Such measures could be used as sweeteners to support program countries, though the short-term effect on growth of such schemes would be insufficient to pull these countries out of recession ,” said Callow.

Sweeteners are needed to help convince Greek voters to back EU-imposed and International Monetary Fund-imposed austerity measures, but with elections due on June 17, there will not be much time for any structural funds to sway public opinion.

Our view on Wednesday’s meeting “is that it will fall short on having many ground-breaking concrete agreements,” Callow said.

“While this is understandable for an informal working dinner, the current environment and, most notably, the Greek situation do give a sense of urgency to every European meeting.”

Bank Deposit Scheme?

Amid reports of money pouring out of banks in Greece and Spain over the last week as people there flock to make withdrawals, there has been talk in the market that EU leaders will implement a European deposit scheme similar to the one put in place in the U.K. when two of its biggest banks were nationalized.

“It is hard to see Berlin endorsing a deposit guarantee scheme given its resistance on other issues that could affect future fiscal liabilities,” said Callow. “Any attempt to increase progress toward a more common deposit insurance framework would need to incorporate the prospective new text due in June from the European Commission on a new framework on bank crisis resolution (which is reported to require banks to contribute to a new fund to finance the future bailout of failed banks) — another complicating factor,” Callow said.

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