3 Themes to Watch at Tomorrow's European Commission Meeting

Tomorrow is the informal meeting of the European Commission and the European heads of state, which is a meeting to help set the agenda and decide on exactly what they will sign at the formal meeting in June. There will be lots of headlines and quoting of every person there, but I think that there are only a few items that investors need to truly pay attention to.

The first big theme will be growth through infrastructure investment. Economists and political analysts alike are expecting the group to agree to add capital to the European Investment Bank (EIB) to allow it to fund further investments throughout the monetary union. The rumor for this number so far has been around 10 billion euros of additional capital, and this number is far too small to be meaningful. Newly elected French President, Francois Hollande, has been preaching a pro-growth economic plan, compared to his predecessor, Nicolas Sarkozy, who was following a path of austerity. It will be interesting to see if a divide grows between Mr. Hollande and Mrs. Merkel as to the debate of austerity vs. pro-growth policies. To really boost growth, the number would have to be much higher than the rumored 10 billion, on the order of hundreds of billions of euros. As we have learned time and again, hope for the best and expect the worst with these politicians. They have consistently promised the moon and delivered a few rocks, and expect this to be not much different.

Another item that has been added to the agenda, which has to be responsible for the strength in financials XLF and Italian stocks today, is the rumor that the EC and the other leaders will discuss using the ESM to recapitalize the European banking system. This would be a great step forward for the politicians, but expect lots of German opposition to this proposal. The Germans are completely against moral hazard and are afraid to do anything that would risk creating moral hazard. The countries that would benefit most from this recapitalization would be Italy and Spain. Italian banks have been beaten down over the last six months on concerns over the health of the Italian government's finances, whereas Spanish banks have a rapidly deteriorating loan book that is likely still over-stated to "fair value." A full recapitalization plan would send stocks through the roof.

The last major theme that will be discussed will be the situation in Greece. Any discussion of a Greek exit will definitely hurt market sentiment, as investors will start to question the credibility of the leaders. For two years, the European politicians were constantly saying that Greece is to remain in the Eurozone, however recently we have heard a slightly different tone. Any indication that the leaders are backing off of this promise will make investors worry that the leaders cannot prevent contagion to the bigger crisis nations, Italy and Spain, and even potentially prevent a bank run on the entire European Monetary Union: if the leaders won't backstop the banks there, even German banks may see assets pulled and parked in safe-havens such as Switzerland.

This will be a major event tomorrow, so keep an eye out.