Who Will Win The Tussle In Brussels? (EWG, EWP, SPY, DIA)

As European leaders spar and jab ahead of this week’s pivotal summit, global investors place their bets on who will win the tussle in Brussels.

Tomorrow Europe’s leaders will gather in Brussels for what could prove to be a pivotal moment in the history of the European Union.

Italy, France and Spain are aligning themselves against Germany with opposing views to how to fix the Euro debt crisis. The debtor countries (Italy, Greece and Spain) are looking to the creditor countries (Germany, Finland) to bail them out of their current problems with various solutions including Euro bonds, a regional savings deposit guarantee and other measures which would mean more obligation for the creditors.

This is a lot like your broke cousin coming to you again and again for more money to help him through a “rough patch.” You can help for awhile but there comes a time when you just can do no more without inflicting real damage on your own finances and put your own family’s future at risk. The creditor nations, led by Germany, have now apparently come to this place as this crucial meeting is about to get underway.

All week long, German Chancellor Angela Merkel has been digging in against any notion of Germany taking on more debt obligations to help our her poor cousins in Southern Europe. She has repeatedly shot down the idea for Euro bonds and insists that there are no quick fixes to the region’s problems and that these short term fixes are unconstitutional in Germany and wrong for her country.

You can’t blame her for not wanting to take on potentially significant liabilities for Italy, Spain and Greece, however, she is sure to come under significant attack for her positions during the upcoming summit. Spain is on the ropes as its borrowing costs reach unsustainable levels. It’s 10 year bond is currently at 6.9% and even short term auctions have yielded increasingly high yields that make it unlikely that the country will be able to continue financing itself on the open market. European Council Herman Van Rompuy has published a “road map” to more European integration, but Dr. Merkel (she holds a PhD. in Physics) has already made it clear that Germany won’t be footing the bill to bail out her poorer cousins.

The big problem here is that real fixes for Europe will take years while the markets appear to be growing impatient and demanding answers now. The question of the hour is how long will markets wait for a solution to acute and immediate problems in Spain, Greece and Italy?

Global investors are carefully handicapping the upcoming “tussle in Brussels” as bond yields continue to rise and the Eurodollar continues its decline.

CurrencyShares Euro Trust ETF (NYSEARCA:FXE) is off 0.2% in mid-morning New York trade while European indexes are higher. Europe ETFs also are advancing early with iShares MSCI Germany ETF (NYSEARCA:EWG) advancing 0.6% and iShares MSCI Spain Index (NYSEARCA:EWP) jumping 0.9%.

U.S. indexes are also higher on Wednesday morning ahead of the Brussels summit with the Dow Jones Industrial Average (NYSEARCA:DIA) up 0.7% and the S&P 500 (NYSEARCA:SPY) gaining 0.8%.

Bottom line: Heading into Thursday’s summit, Europe and the world stand at a pivotal moment. Having been trained over the past few years that central banks and policy makers will cover investors’ backs, global players seem to be hoping/waiting for a last minute save from European leaders, particularly Dr. Merkel. Will she buckle in the 11th hour or does “nein” really mean “nein?” Either way, Germany will take a big financial hit and the answer will depend on Dr. Merkel’s calculus of the risks inherent in each path. As leader of the most powerful nation in Europe, Dr. Merkel will win the tussle in Brussels, even if it means cutting loose her poor cousins in Europe.

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