All eyes on tense summit as euro crisis deepens

(BRUSSELS) - EU leaders debate "a big leap forward" to strengthen their union and save the euro at a two-day summit starting Thursday, but divisions may scuttle efforts to shore up the single currency.

European Union heads of state and government gather from 3:00 pm (1300 GMT) after the debt crisis, now in its third year, widened this week to Cyprus and Spain, after contaminating Greece, Portugal and Ireland.

With Italy, the eurozone's third-largest economy, too under threat, Europe is under pressure to prevent a collapse of the single currency, with unfathomable global repercussions.

European stock markets and the euro slid as traders awaited concrete steps from the summit to tackle the eurozone's spreading debt crisis.

All eyes are on the 27-nation bloc's "big two" economies, Germany and France, traditional drivers of the union, which seem poles apart, with northern and southern European nations largely falling into line behind.

At 11th-hour talks to ease the Paris-Berlin rift, Chancellor Angela Merkel and France's newly-elected socialist leader, President Francois Hollande, strove to present a united stand despite France's pro-growth anti-austerity stance, and Germany's push to have Brussels control national budgets.

"We need more Europe, we need a Europe that works, the markets are expecting this, and we need a Europe whose members help each other," Merkel said in Paris on Wednesday evening.

"We both want to deepen economic, monetary -- and in the future political -- union, to arrive at integration and solidarity," Hollande said.

But after 18 previous summits and piecemeal solutions since 2010, markets remain wary.

This summit "is perhaps the most important since the foundation of the EU" 60 years ago, said the head of the global IIF bank lobby Charles Dallara.

"It's about winning back the trust and confidence of long-term investors," he told the German weekly, Die Zeit. "I'm afraid they'll only allow themselves to be convinced by comprehensive solutions."

But in Spain, Prime Minister Mariano Rajoy warned that the eurozone's fourth economy was running out of time and could not finance itself for long at the high rates of almost 7.0 percent it now pays on markets.

And Italy had to pay investors higher rates of return at a five and ten-year bond sale just hours before the Brussels meet as markets continued to panic following banking turmoil in Spain and fears the summit will produce scarce results.

"Markets have doubts about the survival of the eurozone," said an EU diplomat.

However, a senior German government official said that Italy and Spain should not be overly worried about their high borrowing costs. "I caution against exaggerated panic," said the official, who declined to be named.

Prime Minister Mario Monti has warned he is ready to stay until Sunday if necessary to come up with answers to the crisis that will satisfy markets ahead of Monday's opening.

Among short-term solutions is an ambitious pact to kickstart growth by injecting 130 billion euros ($163 billion) into floundering economies facing record unemployment of 11 percent.

But Merkel, backed by the likes of Austria, Finland and the Netherlands, says there can be "no quick, no easy" solutions, no "magic formula".

Arriving in Brussels for a meeting of the centre-right European parties, Merkel said: "I think the central debate today will be about a package for growth and jobs."

"We have been working on this at all councils this year ... and I think today, the time is ripe to agree it. In any case, I will be pushing for it," said Merkel.

Echoing what many economists have said for years, that the single currency needs a single government, a group of countries led by Germany want stricter control by Brussels or a central eurozone treasury-to-be over national budgets to put a stop to deficits and debt.

But France for one is reluctant to relinquish sovereignty.

At the summit, leaders nonetheless will also discuss a roadmap toward tighter economic and monetary union over the next decade, with the first step a banking union to be agreed by the end of this year.

But "unless France and Germany can soon agree on a grand bargain, disaster may loom," said analyst Charles Grant of the Centre for European Reform.

Hollande, along with Italy's Monti, also favours dipping into the eurozone's 500-billion-euro rescue pot to help Spain's distressed banks or buy bonds of virtuous economies whose borrowing costs are soaring due to market pressure.

But Merkel is firmly opposed to throwing money at struggling banks or poorly run economies.

Commenting on eurobonds, a way of pooling European debt, Merkel said Wednesday: "I consider them wrong and counterproductive."

She is unlikely to be favourable either to reports that Greek Prime Minister Antonis Samaras will ask EU partners to "respond to sacrifices" by changing the conditions of the country's second EU-IMF bailout.

The to-do list at the crunch 
EU summit

The fault lines dividing EU 
leaders ahead of summit

Meeting of the European Council