EU leaders meet in Brussels to save euro
European leaders were wrestling Thursday over how much of their sovereignty they are willing to give up in a desperate attempt to save the ambitious project of continental unity that grew from the ashes of the Second World War.
At stake at the summit in Brussels is not only the future of the euro, but also the stability of the global financial system and the balance of power in Europe.
To convince financial markets that Europe's economy-crushing debt crisis is a one-time event, countries will have to give up significant powers, such as some decisions on borrowing and spending, to a central authority.
French President Nicolas Sarkozy and German Chancellor Angela Merkel want to convince the other 15 eurozone leaders to agree to a plan that would require their governments to balance their budgets and accept automatic sanctions if they don't.
At the same time, the currency bloc's largest economies are being pushed to commit more money to boost the eurozone's firewalls as the crisis threatens to pull down Italy and Spain.
The overall plan must be good enough to convince the European Central Bank to intervene in the government bond markets in a manner large enough to stop the panic there, said Paul De Grauwe, an economics professor and EU expert at the Catholic University of Leuven, in Belgium.
The president of the ECB said the bank currently has no plan to increase the scale of its bond interventions, which could keep down the borrowing costs of weak countries like Italy and Spain, as markets had been hoping.
Stocks and the euro fell, while the borrowing rates for Italy and Spain skyrocketed.
ECB chief Mario Draghi had hinted last week that if governments agree to tighter budget controls, the central bank might step up support.
Analysts said his comments on Thursday served to keep pressure on politicians to reach a deal.
Merkel and Sarkozy want to enshrine the tougher budget oversight in a treaty, either by changing the existing EU treaty or creating a new one for the 17 eurozone nations that others could opt into.
An EU official said that in the first hours of the summit, leaders agreed that national debt brakes should limit deficits before debt and interest payments to 0.5 per cent of annual economic output. The official was speaking on condition of anonymity because the talks were ongoing.
The 0.5 per cent limit, which could only be exceeded in exceptional situations or to counteract a recession, is stricter than the three per cent cap set out in current EU law, although the three per cent also includes interest and debt payments.
'Never has Europe been so necessary, and so much in danger.' —French President Nicholas Sarkozy
"Words alone are not believed anymore because too often we did not live up to our words," Merkel told a rally of fellow European conservatives in Marseille, France, ahead of the summit.
Sarkozy also issued a grand call for action, and many leaders admitted the situation was urgent, but it remained unclear how Friday's negotiations would proceed.
"Never has Europe been so necessary, and so much in danger," Sarkozy told the rally earlier Thursday.
But huge divisions remain.
Some countries resist the idea of giving up some of their control over national budgets. Furthermore, the 10 EU countries that don't use the euro are worried about being left out of important decision-making if eurozone countries adopt a new treaty of their own.
European Council president Herman Van Rompuy and some smaller countries that have stuck to the budget rules in the past, meanwhile, are pushing for much more intrusive powers for European institutions to essentially take over wayward states' fiscal policies that even France and Germany are unlikely to accept.
At the same time, the Germans are still opposing an attempt to strengthen the eurozone's crisis firewall.
Global markets hit
An early draft of conclusions for the summit, which was seen by The Associated Press, says that a permanent $670 billion US bailout fund, which could come into force as soon as July, should not be diminished by loans already given out by the bloc's existing rescue fund.
Those commitments, which already include the bailouts for Ireland and Portugal, could reach around $267 billion US by the time the new fund takes effect.
Markets have mostly risen since last week on hopes that an agreement among European governments on the Franco-German plan would pave the way for the ECB to intervene more aggressively to support eurozone bond markets.
However, investor optimism was deflated on Wednesday, when a German government official said it could take up to Christmas to clinch a deal, and then again on Thursday, when ECB chief Draghi lowered expectations that the central bank might step in with more help.
An ECB rate cut, and more support for banks to get money flowing through the banking system were not enough to keep investors happy.
Markets were hit again a few hours later, when a European regulator said banks have to raise about $154 billion US to meet a new standard meant to inoculate the lenders against market turmoil, including bad government debt.
That's about $10.73 billion more than what the European Banking Authority previously estimated, and bank stocks around the continent plummeted.
With so much at stake on the summit's results, U.S. Treasury Secretary Timothy Geithner was zipping across Europe on a three-day trip to press the region's leaders to solve their differences.
Reforms to deal with the debt crisis are "vital" but their implementation will take some time, Geithner said in Milan, where he met Mario Monti, Italy's new premier.
U.S. Secretary of State Hilary Clinton, who was in Brussels, said the U.S. is willing to offer assistance. "But we do need a plan to rally behind, to know the way forward."