European Union leaders will press for new efforts to boosteconomic growth and improve lending conditions when they meet laterthis month, according to a draft document prepared for a June 28-29summit 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 ECBwill continue to provide liquidity to the banking system. Draghi isworking with EU President Herman Van Rompuy, Luxembourg'sJean-Claude Juncker and European Commission President Jose Barrosoon a blueprint for further integration of the 17-nation euroregion.

This report will set out building blocks for strengthening theeuro area and economic coordination in the broader EU, according tothe draft summit document. “Recent developments” have shown theneed to take monetary union “to a further stage,” according to thedraft dated June 12, which was obtained by Bloomberg News.

Leaders will call for “more specific building blocks” to linkbudget and banking policies among the 17 nations that use the euro,along with stronger governance of the shared currency. Euro-areanations will meet after the full EU meeting, according to thedocument.

The heads of state and government “will call for further urgentmeasures aimed at boosting growth and jobs in Europe and enhancingthe financing of the economy in the short to medium term,”according to the draft. These steps include introducing so-calledproject bonds, making better use of EU infrastructure funds andincreasing the capital, and therefore lending power, of theEuropean Investment Bank. The leaders also expect new proposals inthe autumn for expanding trade within the EU's common market.

The EU's efforts to rein in budget deficits, shore up banks andbuild a crisis-fighting firewall have not been able to quellfinancial turmoil, EU Economic and Monetary Affairs CommissionerOlli Rehn said today.

“These actions have contained the crisis — but not tamed it, notto speak of overcoming it,” Rehn said in the text of a speech to aGoldman Sachs Group Inc. conference in Brussels. He said furtherefforts to shore up the euro area could include a move towardbanking union and more budget coordination, so that countries canconsider pooling debt.

'Economic Sense'

“In the financial circles, few doubt that it makes economicsense to create a deep, liquid and stable market for governmentbonds with the joint issuance of public debt,” Rehn said. “But thisprocess has to provide an answer to the concerns about moralhazard, or a possible free-riding on the budgetary prudence andeconomic 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 ofprocess, timing and goals, David Mackie, chief European economistat JPMorgan Chase & Co., said in a research note today.

“If that summit were to deliver a credible road-map to a fiscaland banking union, it could lower borrowing costs for theperiphery, as debt restructuring and break-up risks were reduced,and pave the way to a different fiscal objective, focusing ondeficits rather than debt, and a much easier monetary stance,”Mackie said.

Spain's downgrade this week has brought the nation within a hairof junk status and risks triggering contagion in Italy and beyondshould investors shun the bonds of the euro area's fourth-biggesteconomy.

The yield on Spain's benchmark 10-year bond was at 6.88 percentat 12:24 p.m. in Madrid. It reached a euro-era record 6.92 percentyesterday after Moody's Investors Service slashed the country'srating three levels to Baa3, one step above junk. Investorsdemanded 5.33 percent more to hold Spanish 10-year debt than thatof Germany, with which it shared an AAA rating as recently asSeptember 2010.

Leaders at the June 28-29 summit are also set to endorse theEuropean Commission's recommendations on national governments'budget, employment and other economic policies, according to thedraft document. Countries must keep cutting budget deficits in away that supports growth, while making efforts to revive lendingand tackle unemployment, according to the paper.

The summit will start with a discussion on Europe's 2014-2020budget planning with the European Parliament, a process that aimsto wrap up this year. The leaders also will call for strongerefforts to promote trade, improve tax collection and fight taxevasion.

Bloomberg News

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