Euro Bonds Hit the Market

“The largest institutional single tranche euro-denominated bond ever issued” was 7 times oversubscribed with demand exceeding €142 billion for the €20 billion NextGen bond that has a 10-year maturity.

Repayment won’t start until 2028, giving Europe a seven year long honeymoon for this first trench of an up to €800 billion package for green and digital infrastructure spending until 2026.

“The strong appetite from global investors shows that the NGEU issuances will establish the EU as a key player on the debt capital markets – issuing liquid, highly rated debt of interest to both domestic and international investors.

Our issuances will also strengthen the international role of the euro,” said Johannes Hahn, European Commissioner for Budget and Administration.

The debt will be rapid by the EU itself which is to boost its budget by levying a carbon tax, digital tax, or financial transaction tax.

“I welcome the excellent collaboration between the Commission’s funding team in Luxembourg and the financial centre ecosystem in making this ‘Hamiltonian’ moment possible,” said the Luxembourg Minister of Finance Pierre Gramegna.

Luxembourg, one of the only remaining city state from the Holy Roman Empire alongside Liechtenstein, marked the listing of the first bond at the Luxembourg Stock Exchange (LuxSE).

“This issuance increases the attractiveness of Europe as a place of investment and strengthens capital market activity across the region. It is a privilege for our exchange to be part of this extraordinary bond issuance,” stated Julie Becker, CEO of LuxSE.

While the recent euro summit highlighted the flamboyance of this still very new governance model with the council ambushed at the last minute on whether to meet Putin and a recent legislation from Hungary taking the other half of the meeting, on the economy there was sweet music for those that want to see a united continent with the council stating:

“We reiterate our full commitment to the completion of the Banking Union and, capitalising on recent discussions, invite the Eurogroup in inclusive format to agree, without delay and on a consensual basis, on a stepwise and time-bound work plan on all outstanding elements needed to complete the Banking Union.

We underline our political support for the Capital Markets Union (CMU) and call for a rapid implementation of the CMU Action Plan in line with the priorities set out in the Council conclusions of 3 December 2020. Structural challenges to the integration and development of capital markets, particularly in targeted areas of corporate insolvency laws, need to be identified and addressed. Green finance, including a green bond standard, can be a catalyst towards a fully-fledged CMU.”

Europe Uniting?

However rowy the summit may have initially seemed, at the end the council was united on politics both on Hungary and on Russia with it putting conditions on the latter before they can restore relations as offered by Vladimir Putin who in an ostensible detente nonetheless seemed to suggest that Nato effectively should be disbanded if there’s to be normal relations.

This out of touch 19th century analysis illustrates Putin’s lack of diplomatic skills as he offered no acceptable way to square the circle, and so in some way strengthened those that say Russia under Putin has no care nor aim to be a jolly good neighbor.

While the episode therefore may have looked a bit chaotic, one does wonder whether this chaos is actually some fine diplomacy in basically the EU saying we do want to talk, but you do have to show that you are really willing to talk as well, by for example abiding with the Minsk agreement.

A greater unnoticed failure was EU’s lack of progress on the Western Balkans which they now see as strategic, with no progress on this front due to a technicality in as far as Bulgaria’s government has fallen yet again, and thus the current caretaker government ostensibly doesn’t have the legitimacy to change Bulgaria’s previous veto on North Macedonia over identity.

This capriciousness however may also be short lived as Slovenia is now to take the presidency where they chair the council, with Slovenia’s Minister of Foreign Affairs, Anže Logar, stating:

“Our roadmap is focused on socio-economic recovery and the integration of the Western Balkans into different European policy areas, ranging from infrastructure, transport and energy connectivity to research and innovation, decarbonisation, digitalisation and cyber resilience.

All this is crucial for a credible and secure European Union, which we would like to highlight at the EU-Western Balkans Summit, hosted by Slovenia this autumn.”

An interesting analysis by Politico also reveals the so called ‘engine’ of the EU, Corep, the constant meeting of the member states permanent representatives who answer directly to the political head of state.

The head of state council meeting therefore may be more a rubber stamping exercise and an opportunity to vent over what the reps couldn’t agree to overcome roadblocks. Hence this council rowing might be a staple of European governance, a bit like the ruthlessness in the House of Commons.

This may explain the show on the political front, as one might expect if for example California and Alabama was in the same room, while nothing was heard on the economy because that show went down last year and they largely agreed to what is now being enacted with these NextGen bonds.

The Multilayer Techy Europe

The flux in European governance and its changing form as it moves towards a continental level awareness can also be seen in the tech fronts.

An interesting analysis on quantum computers points out there’s a €1 billion European Flagship program that especially helps “the smaller countries, which might have high-level industry and research—sufficient scientific power to contribute—but which cannot afford big investments. For them, that’s a really good program.”

Then there’s the national programs. The French have a €2 billion one while in Germany there are even “clusters where the states spend a lot of money—in Bavaria, up to 300 million euros—to strengthen the research and the industry in their regions.”

Italy has a smaller program, but you can imagine the Swedish, Danish, Belgian, Dutch, even the Estonian talent can potentially be tapped by the European Flagship program gluing national programs together.

There’s not enough of that gluing with its lack more visible perhaps on the blockchain and AI space where Europe has the most of talent as a study by the European Investment Bank (EIB) and European Commission stated:

“Europe has the largest talent pool of researchers in artificial intelligence, with an estimated 43 064 in the field (of whom 7 998 are in the United Kingdom), compared with 28 536 in the United States and 18 232 in China.”

Nonetheless the United States and China together account for over 80% of the €25 billion in annual equity invested in artificial intelligence and blockchain technologies, while the EU27 only accounts for 7% of this total, investing around €1.75 billion per year.

There’s a €10 billion investment gap in artificial intelligence and blockchain technologies in the European Union, they find, with it perhaps time for the European structure to expand to at least include permanent reps focused on the economy only.

These new bonds should assist towards that European economy, with S&P Global Ratings revising upward their forecast for eurozone growth to 4.4% this year and 4.5% in 2022 because of “broader implementation of fiscal stimulus under the Next Generation EU plan and weaker contraction of GDP in the first quarter.”

It’s not clear however whether they’re doing enough with U.S. President Joe Biden finally reaching a $579 billion infrastructure agreement that brings total federal investment in infrastructure to nearly $1 trillion over five years.

In the United States, both the federal government and state governments have been able to raise funds, while In Europe, only member states have been able to do so until now.

NextGen thus should add a new dimension and some dynamism especially as there’s a seven years long honeymoon period with US treasury bonds so finding some competition as some may well see Europe as an even safer haven.

That could potentially develop financial markets in the EU and increase the sophistication of financial instruments, including European stocks.

Marking thus a greater integration of the continent as its governance starts to function at a meaningful level, including tax and spend.

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