PRIMER: EU Versailles’ two-day meeting; Thursday will focus on Ukraine (energy and defence), Friday will be focused on finance

Thursday

• 
  Arrivals at the meeting are from 15:00GMT/10:00EST onwards, followed by an exchange of views with the European Parliament President Metsola at 16:30GMT/11:30EST, which then sees the working session on “Ukraine, defence, energy” commence. Dinner is scheduled for around 19:45GMT/14:45EST. The gathering was originally to be focused almost entirely on the current economic situation however, this has been altered to just Friday.


• Overall, markets will be looking for any fresh updates on Ukraine’s bid to join the EU, an increase to the European Peace Facility, mention of the mutual defence clause, plans to reduce Russian energy dependence and any provisions to offset the impact of current energy prices.


• 
  Ukraine – Focus will, primarily, be on enlargement i.e. Ukraine’s bid for EU membership. In short, this is very unlikely to happen any time soon; due to Ukraine not fulfilling numerous components of the entry criteria. Albeit, the Council has already asked the Commission to begin preparing an opinion on Ukraine’s fast-track bid with a deadline of just one week, significantly faster than is typically the case. However, Politico highlights that there will be no firm commitment and the opinion will contain vague language, citing a senior Commission official saying that “they are trying to find a way to say ‘No’”.


• 
  Defence – Spending will likely be a talking point, following the bloc agreeing to utilise the European Peace Facility for the provision of around EUR 500mln, out of a EUR 5bln allocated budget for 2021-2027; on this, there is the possibility that some members states, the more eastern ones, will push for additions to this. Attention will also be on the mutual defence clause within the Treaty of the European Union, a clause that has only been activated once during the Paris terrorist attacks, which stipulates that if a member of the European Union is the victim of “armed aggression on its territory” other states have an “obligation of aid and assistance by all the means in their power.” – notably, this does not ensure a military response and allows member states to remain neutral. On this, it will be interesting to see if it is explicitly referenced in any communication and, if so, in what context.


• 
  Energy – Thus far, the Commission has outlined plans to cut its dependence on Russian gas and aims to be entirely free from such dependency by 2030, aiming to cut Russian gas imports by two-thirds within one year. In terms of potential alternatives, member nations could import more LNG, for instance, while European Green Commissioner Timmermans acknowledged that some nations may need to utilise coal for longer than intended. On the 2030 date, an official has remarked that some are also suggesting a 2027 target, adding that some member states may hit this goal earlier; thus, we are attentive to any official mention of this, or other, dates. Elsewhere, numerous member states have called for various measures to offset the impact of heightened energy prices; for instance, Greek PM Mitsotakis is calling for “targeted and temporary market intervention” within the electricity and gas markets, such intervention is justified by the high level of price volatility; calling for a price and profit cap, alongside an emergency price setting, via Politico. One potential approach that has been reported via the FT is a relaxation of state aid rules, with officials highlighting that the current treaty allows for damage compensation from exceptional circumstances.

Friday

• 
  Arrivals from 08:00GMT/03:00EST, with the working session on “new growth and investment model” due from 09:00GMT/04:00EST; a press conference, timing TBC, will follow.


• Overall, markets will be looking for explicit details on the reported European Fund around its size, provision of grants/loans, repayment plans and whether utilisation of existing budgetary headroom will occur first.


• 
  Joint Issuance – On Tuesday (March 8th), Bloomberg reported that the EU is considering a massive joint bond sale to finance defence and energy. Official details on this remain fairly light but we have seen commentary from Commission VP Timmermans that they have no plans to sell debt to finance energy – didn’t comment on the defence aspect. Additionally, Dutch PM Rutte indicated that existing financial provisions should be utilised first, echoed by Executive VP Dombrovskis saying that the “first-line” was to utilise existing headroom within the Recovery and Resilience Plan.


• The most detailed update stemmed from Eurasia Group’s Rahman, citing officials, that EUR 200bln is seen as a realistic figure with a 2030 timeframe. Interestingly, funding would occur via the Commission borrowing on capital markets and transferring proceeds as grants. The phrasing of the funding as being a 'grant' as opposed to a 'loan' is interesting and would be of note for the periphery nations in particular. However, it is worth highlighting that Dombrovskis is opposed to this, pushing for a loan-based solution instead and the more ‘hawkish’ states will likely take issue – particularly as there is no agreement on how to repay the funding. Nonetheless, Rahman writes that no political agreement is likely at the Versailles meeting, base case scenario would be a mandate from leaders to officials to explore common borrowing. With a view towards delivering something more definitive at the end-March EU Council, set for March 24th-25th.

10 Mar 2022 - 08:45- EquitiesResearch Sheet- Source: Newsquawk