REUTERS - France and Germany are to sound out conservative European leaders on Thursday about their plan to defuse the euro zone’s debt crisis, eager to rally support before a high-stakes EU summit.

Paris and Berlin need to win backing quickly for their crisis plan, which aims to amend the European Union’s Lisbon treaty to toughen budget discipline, if they are to have it ready as they hope by March.

President Nicolas Sarkozy and Chancellor Angela Merkel have a chance to rally some other leaders behind their masterplan before the EU summit at a congress of the conservative European People’s Party on Thursday in Marseille, southern France.

With many details still to be hammered out, Sarkozy and Merkel want to secure other EU countries’ support at the summit starting late Thursday in Brussels and scheduled to end on Friday.

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But a senior German official dampened hopes for a breakthrough at the summit while, in contrast, France’s finance minister said the leaders of the two countries would not leave Brussels until a “powerful” deal had emerged.

If all 27 EU states do not support more fiscal union by adapting the treaty, which took eight years to negotiate, then Sarkozy and Merkel want the 17 euro zone countries to go ahead alone with more integration.

The French and German leaders are due to arrive at mid morning in Marseille, and Sarkozy is due to make a speech at 1230 GMT. He and Merkel are both due to hold bilateral meetings later with Spanish Prime Minister-elect Mariano Rajoy before they head to Brussels.

“We need more binding and more ambitious rules and commitments for the euro area member states,” Sarkozy and Merkel wrote in a letter to European Council President Herman Van Rompuy, who has made his own proposals for tackling the crisis.

“They should reflect that sharing a single currency means sharing responsibility for the euro area as a whole,” the letter added.

The art of building a consensus

The Franco-German plan would change the EU’s treaty to slap automatic penalties on countries that overshoot deficit targets. The sanctions could be stopped only if three quarters of euro zone countries are against them.

Not all euro zone countries are comfortable with all the French and German proposals, with Finland opposed to their call for majority votes on major policy decisions.

“Finland’s view is very clear, our stance is that unanimity is required in decision making ... and that is the view Finland will promote going forward as well,” Finnish Finance Minister Jutta Urpilainen told reporters on Wednesday in Helsinki.

European Central Bank President Mario Draghi signalled last week that an overhaul of the euro zone’s fiscal rules would be the condition for the central bank playing a greater role in calming the debt crisis.

With financial market doubts hanging over the euro zone’s EFSF financial rescue fund, many economists say that the most effective way of getting a grip on the crisis would be for the ECB to play a more aggressive role.

As EU leaders prepare for their summit, the ECB will meet in Frankfurt on Thursday for a monetary policy meeting at which economists widely expect it to cut interest rates by 25 basis points to a record low of 1.0 percent.

In a sign of concern about the crisis beyond Europe, U.S. Treasury Secretary Timothy Geithner has met Sarkozy and Draghi among other top officials during a whistlestop tour of Europe to seek a breakthrough in the debt crisis.

EU leaders attending the Marseille congress are due to head to Brussels mid afternoon in time for a summit dinner, likely to run late into the night with many details about the crisis plan to be worked out.

AP – U.S. Treasury Secretary Timothy Geithner said Wednesday he is very encouraged with the progress Europe is making in coming up with a plan to shore up the euro in the wake of a crippling debt crisis.

Geithner’s comments to reporters followed a meeting with French Finance Minister Francois Baroin on the second day of his whirlwind trip through Europe.

At a summit on Friday, Europe’s leaders will discuss proposals made by France and Germany to impose greater budget discipline on the 17 nations that use the euro as a common currency.

Baroin said he and Geithner had spoken about building a “robust firewall” to reassure financial markets. Baroin also said they had also discussed greater involvement by the International Monetary Fund in resolving the debt crisis.

European countries have been pushing for more support for the IMF, which is already helping in the financial bailouts of Greece, Ireland and Portugal. But the United States has previously said that the IMF has adequate resources following a big increase in its financial firepower following the 2008 financial crisis.

However, U.S. officials have said they were reviewing a European proposal that some European governments would loan the IMF money that the agency could use to make loans to countries facing financial problems.

Geithner did not comment directly on Baroin’s remarks about increasing IMF support but he called their meeting a “good, constructive” discussion.

“We are very encouraged with the progress that is being made,” Geithner said.

Earlier, China also expressed support for the current outlines of the plan and offered to work with European governments.

“China always supports the development of European integration as well as efforts by the European Union to resolve the debt crisis,” Foreign Ministry spokesman Hong Lei said at a daily media briefing. “We’re ready to work with the international community to prevent turbulence in international financial markets and the world economy and promote a return to growth.”

Geithner said a successful resolution of the European debt crisis is very important to the United States and the global economy.

Geithner met with Baroin in advance of discussions later with French President Nicolas Sarkozy.
On Tuesday, he began his three-day trip with meetings in Germany with Mario Draghi, the new head of the European Central Bank, and with German Finance Minister Wolfgang Schaeuble.

He is due to wrap up his trip with a meeting with new Italian Premier Mario Monti in Milan on Thursday.

AFP - British Prime Minister David Cameron said Tuesday he would block a new European Union treaty proposed by France and Germany aimed at saving the euro, if London's demands are not met.

He said if eurozone countries wanted to use "European institutions" to rescue the single currency, they would have to agree to safeguards demanded by Britain, which has not adopted the euro.

"I won't sign a treaty that doesn't have those safeguards in it, around things like, of course, the importance of the single market and financial services," said Cameron.

France and Germany said Monday they wanted a new EU treaty by March with tougher budgetary rules to deal with the debt crisis.

French President Nicolas Sarkozy said the new treaty would be either for all 27 EU members or for the 17 members of the eurozone, with other nations signing on a voluntary basis.

Cameron said that if eurozone countries "choose to go ahead with a separate treaty, then clearly that is not a treaty that Britain would be signing or would be amending.

"But, of course, if they want to use the European institutions, then we will be insisting on the safeguards and the protections that Britain needs."

REUTERS - German Chancellor Angela Merkel called on Friday for rapid EU treaty change to remedy the root causes of the euro zone's debt crisis but warned that Europeans faced a long, hard "marathon" to restore lost credibility.

Outlining a long-term approach to tighter fiscal integration in the single currency area, with tougher budget discipline, she dismissed quick fixes such as massive Fed-style money printing by the European Central Bank or issuing joint euro zone bonds.

"Resolving the sovereign debt crisis is a process, and this process will take years," Merkel told parliament, vowing to defend the euro, which she said was stronger than Germany's former deutschemark.

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"The European Central Bank has a different task from that of the U.S. Fed or the Bank of England," the German leader said.

However, sources close to Merkel said she was willing to see the ECB step up its buying of troubled euro zone countries' bonds as a bridging measure until budget controls took hold, but did not see it as a durable solution.

Speaking a week before a European Union summit seen as make-or-break for the 17-nation single currency area, Merkel ruled out issuing common euro zone bonds, saying that would breach the German constitution.

Instead, she called for a mixture of greater European powers to control national budgets, to be enshrined in treaty changes, and smart use of the euro zone rescue fund to stabilise markets.

Merkel's speech set the agenda for seven days of intense diplomacy to try to frame a new political deal to restore shattered market confidence and give the ECB grounds to act more decisively to defend the euro.

World stocks and European bonds continued to recover on hopes that euro zone leaders may be moving closer to a comprehensive solution to the debt crisis.

In a crucial signal to markets, ECB President Mario Draghi opened the door on Thursday to more aggressive action to help fight the euro zone's sovereign debt and banking crisis if governments adopted a new "fiscal compact".

On Monday, Merkel will travel to Paris to outline joint proposals with French President Nicolas Sarkozy for treaty changes to entrench stricter budget controls, with automatic sanctions on deficit sinners.

Sarkozy embraced German calls for a new treaty tightening fiscal discipline in a policy speech in Toulon on Thursday, but in contrast to Merkel, he made no mention of greater powers for the European Commission and European Court of Justice.

Instead, the French leader, struggling to win re-election next May, called for an "intergovernmental" Europe in which the presidents and prime ministers of euro zone Countries would be the ultimate arbiters over national budgets.

His socialist opponents denounced him for advocating an "austerity treaty" dictated by Germany.

Merkel went out of her way to rebutt such accusations, telling the Bundestag it was "misleading" to suggest Germans were trying to dominate Europe.

Markets recover

Sarkozy will try to persuade British Prime Minister David Cameron on Friday to accept EU treaty changes to allow closer euro zone integration without insisting on returning powers over social and judicial affairs from Brussels to London.

Cameron is under pressure from Eurosceptics in his own Conservative party to loosen Britain's ties with the EU while securing guarantees that any move towards fiscal union on the continent does not harm the interests of the City of London financial centre.

Despite their very different tone, Merkel and Sarkozy coordinated their speeches in advance to ensure they would not be incompatible, aides to both leaders said.

EU diplomats said Paris and Berlin hoped to find agreement among all 27 member states for limited treaty amendments rather than having to take the more divisive route of drafting a separate among the 17 euro zone states or fewer.

German officials praised the conservative Sarkozy's courage in telling voters, in what the business daily Handelsblatt called a "blood, sweat and tears speech", that France would have
to overhaul its social model and cut public spending.

Peter Altmaier, chief whip of Merkel's conservatives in the Bundestag, told German radio: "In Germany we have been tightening our budget for some years. Nicolas Sarkozy said
yesterday that Europe must achieve a reduction of its debt, and that will only happen with iron discipline in national budgets.

"We have so far managed to fix a German-French position on all the important decisions on Europe in recent months. I am very confident that we will be able to reach a common position with our French friends by the summit next week. There is much more uniting us than dividing us."

On the markets, German 10-year Bunds outperformed safe-haven U.S. Treasuries and British Gilts as investors saw prospects of an EU summit deal and ECB action to ease funding for cash-starved banks and to counter a looming recession in Europe.

Sentiment has turned more positive since the world's major central banks took emergency joint action on Wednesday to provide cheaper dollar funding for European banks.

Yields on Italian and Spanish debt fell further on hopes of a euro zone solution. Italy's 10-year bond was down to 6.65 percent, well below the danger levels close to 8 percent they hit last week, which analysts said could make it impossible for Rome to refinance its debt next year. Spain's 10-year borrowing cost tumbled to 5.68 percent.

A key measure of dollar funding stress felt by euro zone banks, the three-month euro/dollar cross currency basis swap, which shows the rate charged when swapping euro interest rate payments on an underlying asset into dollars, has narrowed by 30 basis points since the coordinated central bank move to around minus 130 bps. The basis swap was at its widest since end-2008 -- at the height of the global financial crisis -- before the central banks' move.