Europe treads water ahead of EU summit

EUROPEAN shares ended flat yesteday, with banks among the top fallers, as investors traded cautiously ahead of the outcome of a Eurozone finance ministers meeting aimed at discussing changes to the bloc’s rescue fund.

The pan-European FTSEurofirst 300 index of top shares provisionally closed flat at 1,156.59 points.

Financials were lower, with the STOXX Europe 600 banking index down 0.6 per cent, though losses were offset by strength in defensive pharmaceutical stocks, including Smith & Nephew which rose 3.9 per cent on reports of a takeover approach by Johnson & Johnson.

Eurozone finance ministers are set to discuss changes to the effective lending capacity of the European Financial Stability Facility (EFSF), though no final decision was expected, with Germany seeing no need for bolstering the fund’s size.

“It would be good for the Eurozone as a whole if they (the ministers) can calm some of the nerves, but by what actions? We will have to live with discussions about the debt problems for months and quarters to come,” said Heinz-Gerd Sonnenschein, equity markets strategist at Deutsche Postbank in Bonn.

“Generally there is very little newsflow, so all eyes are on the Eurozone meeting. Policymakers have a tendency to over-promise and that might be the risk now,” added Graham Bishop, equity strategist at RBS.

He said that in the short term, investors were concerned that policymakers might disappoint in announcing something definitive, but the bigger picture was still positive and factors such as low valuations were expected to help equities.

Eurozone finance ministers called yesterday for an increase in the effective lending capacity of the currency bloc’s rescue fund, but EU paymaster Germany said there was no urgency and it would be March before a firm plan was in place.

Growing realisation that a deal to widen the bailout fund was not imminent caused the euro to retreat yesterday from a one-month high.

Dutch finance minister Jan Kees de Jager said it was vital that Eurozone governments under pressure forge ahead with structural economic reforms and deficit-cutting to make debt levels sustainable.

It was also important that the full amount earmarked for states shut out of credit markets be available if required, not the smaller amount that can actually be tapped now because of the need to put cash aside, he said.