Sarkozy, Merkel thrash out euro crisis plan
Merkel - Sarkozy - Photo EU Council
(PARIS) - French President Nicolas Sarkozy hosts German Chancellor Angela Merkel on Monday for a crunch summit to thrash out a plan to save the euro at the start of a pivotal week for the single currency.
The two leaders hope to agree on proposals to change European Union treaties to strengthen the bloc's budgetary discipline that can be discussed at an EU summit in Brussels on Thursday.
The meeting comes as Italy kicked off the crucial week with a draconian austerity package of cuts, taxes and pension reforms to be presented to parliament on Monday as Europe picks up the pace to keep the euro alive.
Ireland's Prime Minister Enda Kenny was also on Monday to announce a 3.8 billion euro austerity budget, a day after warning citizens to brace for years of economic hardship during a historic television address.
Merkel and Sarkozy are to have a working lunch in Paris, having vowed to propose EU treaty changes to create what Merkel has dubbed a "European fiscal union with strict rules" and Sarkozy calls "true economic government".
The two leaders are to hold a joint press conference after the lunch, which is to start at 1230 GMT.
While Sarkozy supports stricter budget discipline, and punishment for states that do not fall in line, he is against bolstering the role of the European Commission or increased federalism, as sought by Germany.
Whatever proposals emerge from the talks must be seen as a credible guarantee that eurozone governments will at last bring their deficits under control and thereby satisfy restive markets.
European Central Bank chief Mario Draghi has said he could then take action, and many hope the bank will intervene to protect European banks from a credit crunch and buy bonds to rein in soaring rates on government borrowing.
After Monday's Franco-German mini-summit, EU leaders will have three days to digest the two countries' proposals before Thursday's EU summit in Brussels and ECB board meeting in Frankfurt.
Some countries may be obliged by national law to put any new treaty proposed by Sarkozy and Merkel to a referendum, which might delay or even derail its implementation.
Sarkozy and Merkel have sought to take charge of the debt crisis, working so closely together that the media have dubbed them "Merkozy" and running the risk of alienating smaller EU states wary of Franco-German domination.
In Rome, the cabinet gave its go-ahead to the crisis-busting plan on Sunday estimating that it would save 20 billion euros ($27 billion) but warning that it would not prevent the economy from slipping back into recession next year.
"This is a decree to save Italy," Prime Minister Mario Monti told reporters after the cabinet meeting. Italy will "put its deficit and debt under strong control," he said.
The Italian measures helped tensions to ease sharply on European bond markets, with rates falling on Italian 10-year debt, as well as in Spain and France.
In mid-morning trading, the yield or interest rate indicated on 10-year Italian bonds stood at 6.366 percent, down from 6.661 percent on Friday.
The 10-year rate for Spanish bonds also fell, to 5.418 percent against 5.626 percent on Friday.
In France, the 10-year rate dropped to 3.170 percent from 3.253 percent.
Tensions on the eurozone bond market had already eased at the end of last week on rising sentiment that Germany and France are coming close to a new strategy for the eurozone debt crisis.
Italy, the eurozone's third-biggest economy, is desperate to prove to its European neighbours that it should be part of the discussions on saving the eurozone -- rather than being seen as one of its biggest problems.
In Dublin, Kenny said the Irish government would need to cut public spending by 2.2 billion euros and raise 1.6 billion euros in extra taxes to meet its obligations.
Ireland has had four austerity budgets in just over three years after its Celtic Tiger economic boom turned to bust when a property bubble collapsed and triggered a banking crisis.
Amid concern that the eurozone crisis will trigger a global economic downturn, US Treasury Secretary Timothy Geithner has also been dispatched to Europe, where he arrives on Tuesday to pressure leaders to take effective action on the debt crisis.