2 Major Themes To Expect From the EU Summit

We’re down to the last few hours before the EU Summit! With concerns on the outcome of the meeting dominating the newswires lately, it’s hard for traders not to speculate on it. Here are two themes that are most likely to come up at the highly anticipated summit.

1. Merkozy’s proposal and the 27 EU states

Germany’s Angela Merkel and France’s Nicholas Sarkozy boosted risk appetite early this week when both supported a change in the EU Lisbon treaty. Apparently, they want a sanction on the EU states that have budget deficits higher than 3% of their GDP. Merkel and Sarkozy hope that the move will encourage confidence in the euro region.

Merkel and Sarkozy (dubbed as “Merkozy“) are scheduled to meet with EU President Hermann Van Rompuy today to discuss the details of the plan, and now markets are closely watching to see if all 27 EU states will be on board with it.

Some say that a united front will go a long way at boosting risk appetite, but some European officials hint that a consensus might not be easily reached, especially if markets expect one by Friday. Heck, the original EU Lisbon Treaty took eight years to draft!

Sarkozy stated that they are willing to settle for just the agreement of all the 17 euro zone states if the 27 EU states don’t agree to the plan. But a German official recently hinted that they’re having a hard enough time convincing some of the euro zone states to agree to the Merkozy proposal.

If the euro zone countries fail to present a united front, or if Merkel and Sarkozy don’t find a speedy method of implementing their plan, then we’ll most likely see the euro weaken against its counterparts.

2. Details on the ESM and EFSF

Two days ago, I heard the financial negotiators in Europe have proposed for the ECB to facilitate the European Stability Mechanism (ESM) alongside the European Financial Stability Fund (EFSF).

For those living under a rock, the EFSF is a 440-billion EUR worth of special fund financed by euro zone members used to fight the region’s sovereign debt crisis. The ESM, on the other hand, is the long-term permanent fund created to replace the EFSF in mid-2013 (or early 2012 if Merkel had her way). Negotiators hope that by combining the two funds, the firepower to combat the debt crisis would be doubled and contagion fears would be reduced.

Unfortunately, the plan has been met with strong criticism. The German government, for instance, said that they are opposed to combining both funds. What’s more, an ECB official has already admitted that the central bank doesn’t have the capacity to handle both funds. In any case, we’ll probably see more details regarding the issue in the upcoming EU summit.

I suspect “Merkozy” and other European financials will pull out all the stops to assure that market that they are doing their best to combat the debt problems. But given the European leaders’ history disappointing expectations, many investors aren’t holding their breath. Let’s hope something substantial comes out of the meeting and help alleviate euro zone’s debt problems!