Ukraine prepares for reconstruction talks with international partners

Good morning and welcome to Europe Express.

Funding Ukraine (including its postwar reconstruction) is back on the agenda today as international donors meet in Switzerland for a dedicated conference. We’ll bring you the latest in terms of the costs Kyiv is facing and what European partners are willing to set up.

In Strasbourg, the European parliament reconvenes for its last plenary before summer break, with lawmakers possibly dealing a blow to the EU commission’s plans to label nuclear and gas as green investments.

And on the Brexit front, we’ll hear from the EU financial services commissioner and her inclination to move clearing from London to the EU.

Gateway funds

Russia may still be raining missiles down on Ukraine, but that hasn’t stopped Kyiv from pushing its partners to start earmarking the billions of euros that will be needed to rebuild from the rubble Moscow leaves behind, writes Sam Fleming in Brussels.

The discussion will pick up tempo today in Switzerland, where representatives of Volodymyr Zelenskyy’s government will meet partners in Lugano for a ‘recovery conference’ focusing on the country’s future.

The scale of what will be needed is vast. Draft estimates seen by Europe Express ahead of the conference suggest Ukraine is putting a price tag of $750bn on the country’s national recovery programme.

Among the priorities are macrofinancial stability and defence — two areas where the country’s partners have already been funnelling support. But tens of billions will also be needed for large-scale infrastructure projects, including energy, the rebuilding of housing, and agricultural irrigation — and on top of that there will need to be support for the financial system.

Finding the necessary funding and ensuring it is well-targeted will be a prodigiously difficult task, a large part of which will fall to the EU and its member states.

The costs are going up by the day, given the continued devastation caused by the war. Werner Hoyer, the head of the European Investment Bank, has predicted it will take €1tn of outside assistance to rebuild Ukraine. His institution is one of those pitching for a key role alongside the European Commission in the rebuilding effort.

According to a draft plan due to be unveiled in Lugano, also seen by Europe Express, the Luxembourg-based EIB will propose an EU-Ukraine “gateway trust fund” to spearhead project-based spending in the reconstruction effort. It would leverage funds from donors by offering guarantees, investment grants, and technical assistance aimed at rebuilding sustainable infrastructure, revitalising the economy and investing in the population.

The EIB thinks the trust fund could be up and running in a matter of weeks, given it uses off-the-shelf structures already tried and tested in the Covid-19 recovery. The initial value of the fund would be around €20bn, permitting it to mobilise up to €100bn.

If the trust fund were set up as soon as September, it could start financing projects by the end of this year. This could include offering guarantees to reduce the risk in investments such as restoring damaged electricity grids and repairing destroyed railway lines.

All this would need to be approved by the EU and its member states, however. And given the lengthy gestation involved in the EU’s latest proposed macrofinancial assistance programme of up to €9bn, it remains to be seen how easy it will be for the union to corral these enormous sums.

An EIB spokesperson declined to comment on the specifics, saying the bank will present its proposals on Monday.

Going (after) nuclear

School’s not quite out for EU lawmakers who head to France this week for what are likely to be heated debates on key pieces of climate and energy policy, writes Alice Hancock in Strasbourg.

Hotly anticipated is the crunch vote on the commission’s decision to label gas and nuclear projects as “green” in its landmark financial labelling system known as the “taxonomy for sustainable finance”, designed to guide investors towards environmentally friendly ventures.

The parliament’s environment committee has narrowly rejected the inclusion of gas and nuclear, despite the commission’s efforts to stipulate that investors should only consider the two energy sources as green under certain circumstances.

So impassioned is the topic, that some MEPs have already said they will sue the commission if the law is passed. The centre-right European People’s party, parliament’s largest grouping, has yet to say which way it will guide its members to vote, so far saying that they will probably vote according to “national interests” (Germany is in favour of gas, France of nuclear).

MEPs will also decide on what should be permitted as a sustainable fuel for aviation and whether these should include biofuels that involve the burning of wood chips or animal fats.

And with the cost of living surging across the bloc, lawmakers will debate something that has already animated several national governments: how to apply a windfall tax to energy companies as oil and gas prices spiral upwards and what more the EU can do to ease pressure on consumers.

Away from the climate, the Strasbourg plenary will see the formal approval of the bloc’s Digital Services Act and Digital Markets Act: two key laws designed to curb the power of the big tech companies. On the foreign affairs front, MEPs will debate the controversial US Supreme Court decision to row back on women’s reproductive rights and the UK government’s legislative plans to unilaterally scrap parts of the Northern Ireland protocol.

Financial Brexit

What impact could the UK’s decision to make unilateral changes to its Brexit trade deal with the EU have on the City of London? Legislation to override the Northern Ireland protocol has raised the temperature in Brussels and it has barred UK researchers from the Horizon funding programme as a consequence, writes Andy Bounds in Brussels.

The European Commission has so far taken a pragmatic approach to financial services collaboration. In particular, it has recognised that EU financial institutions depend on London for clearing services and accepted UK regulatory “equivalence” until June 2025.

But Mairead McGuinness, the financial services commissioner, told the FT that the EU cannot indefinitely outsource market stability to another country — especially one that makes clear it wants to do things differently.

Referring to talks on the protocol, the Irish commissioner said: “We are still at the table. But the UK has left and just said, look, we’re off to do our own thing and we’ll come back when that’s finished and show you the result.” 

That has implications for financial services. “Where there are deviations that are significant, we have to take account of those and where there are vulnerabilities in terms of our resilience or reliance on the UK for critical infrastructure in the financial system, we have to take action.

“We saw because of Covid that our supply chains were incredibly vulnerable around pharmaceuticals and protective equipment. That won’t happen again because we’ve learned a lesson. I think on the financial side, we don’t want to learn the lesson first and then act. We want to be prudent.”

LCH Clearing in London handles about 90 per cent of all euro-denominated derivatives, representing around €80tn of open euro derivatives contracts. The industry is unwilling to bear the cost of moving the contracts to the EU but McGuinness has already run a consultation on how the EU could build its own capacity and improve supervision.

McGuinness expects to propose measures to do so this year. She said both London and Brussels could benefit from a growing market and there was no wish to “steal business”.

“If Europe builds up its own infrastructure, particularly around CCPs [central counterparties], that’s to our good. But it’s not to weaken the United Kingdom,” she said.

What to watch today

1. Donor conference for Ukraine’s reconstruction takes place in Lugano, Switzerland

2. ECB vice-president Luis de Guindos speaks at the Frankfurt euro finance summit organised

3. European parliament kicks off its last Strasbourg plenary before summer break

. . . and later this week

1. Greek Prime Minister Kyriakos Mitsotakis speaks in the European parliament tomorrow, Czech PM Petr Fiala on Wednesday

2. European parliament debates and votes on including gas and nuclear in the bloc’s taxonomy for sustainable investments tomorrow and Wednesday

3. ECB governing council holds non-monetary policy meeting in Frankfurt on Wednesday

Notable, Quotable

In some countries there’s a strong infrastructure on sanctions implementation and others not so

• Sanctions agency: Financial services commissioner Mairead McGuinness told the FT that she would be open to the idea of setting up an EU version of the Office of Foreign Assets Control (Ofac), the powerful US Treasury agency that spearheads enforcement of its sanctions.

• ECB trimming: The European Central Bank plans to discuss ways to avoid banks earning billions of euros of extra profit from the ultra-cheap lending scheme it launched during the pandemic once it starts to raise interest rates later this month.