Overhaul of EU budget rules to dominate summit

Instead, leaders hope to focus on the EU's 2020 strategy to restore long-term sustainable growth to the region, and discuss European Council President Herman Van Rompuy's mid-term report on stepping up European economic governance.

"Convergence on the eve of the [European] Council meeting is confirming itself more and more strongly," said one senior EU source working on the summit's preparation, a reference to France's decision to drop controversial plans for a eurozone 'economic government' and recent member state agreements on the outstanding 2020 targets.

A final political agreement on Thursday on the five headline EU targets in the areas of employment, innovation, climate change, education and poverty will enable capitals to subsequently define national goals over the autumn.

Analysts say governance continues to be the growth strategy's weak point however, with leaders unlikely to agree to a concrete mechanism to ensure member state compliance.

Questions of governance are also central to EU attempts to prevent a repeat of the region's ongoing debt debacle, although the exact nature of sanctions for overspending states has yet to be agreed. Poland and a number of other eastern members are concerned that plans to restrict EU funding could disproportionately affect poorer regions.

German proposals to withdraw Council voting rights for fiscal miscreants are also unpopular in several member states who fear such a move would first require an EU Treaty change.

The UK is vehemently opposed to calls for a peer review of member-state budgets ahead of national parliaments, potentially leading to language in the summit conclusions which draws a distinction between eurozone and non-eurozone members.

Italy is pushing for any new emphasis on debt levels under a tightening of the bloc's fiscal rules to take account of both public and private debt. The country has the highest government debt in the EU, at around 125 percent of GDP, but a relatively high savings rate among its households, which helps to improve the picture.

"Italy is ready to withdraw its consensus on the whole [summit] document unless a reference is placed to the aggregate debt, not only to public debt," foreign minister Franco Frattini threatened on Monday. Indebted Belgium is also looking for language to be softened in this area.

With roughly ten days to go until G20 leaders meet in Toronto, EU officials are keen that Europe take a common position into the new agenda setting forum. How to square the need for fiscal consolidation with renewed growth is likely to dominate the Canadian meeting, with discussion also set to focus on plans for a global bank levy.

EU leaders on Thursday will discuss last month's commission communication on the subject which suggested building a network of national funds rather than one common European pot. "There are quite differing levels of enthusiasm for the levy," a senior European diplomat said on Wednesday, an indication that a common European position may yet prove unattainable.

A number of non-financial issues are also up for discussion during Thursday's talks, with leaders expected to reaffirm their intention to meet the Millennium Development Goals by the 2015 deadline, despite ongoing criticism from NGOs that governments are using the financial crisis to shirk commitments in this area.

Leaders will debate the commission's recent communication on cutting the region's CO2 emissions by 30 percent by 2020, rather than the currently agreed 20 percent, and state their intention to go further than measures contained in the UN's latest round of sanctions on Iran.

Draft Council conclusions indicate that member states are also ready to open EU accession negotiations with Iceland, itself home to a dramatic banking collapse in 2008.