Paris: The leaders of France and Germany will not leave this week’s EU summit until a “powerful" deal is reached on the euro zone debt crisis, the French government said on Wednesday while US treasury secretary Timothy Geithner urged bold steps.

Geithner, on a whistle-stop tour of Europe to demand dramatic action, voiced confidence in a Franco-German plan to overhaul the EU treaty after Standard & Poor’s warned it could cut credit ratings across the currency bloc, including the EFSF rescue fund, a move which would fundamentally weaken it.

“I have a lot of confidence in what the president of France and the minister are doing, working with Germany to build a stronger Europe," Geithner told reporters after talks with French finance minister Francois Baroin.

French President Nicolas Sarkozy and German chancellor Angela Merkel will lay out their plan at Friday’s EU summit to impose mandatory penalties on euro states that exceed deficit targets, with the aim of restoring market trust and preventing the region’s deepening debt crisis spiralling out of control.

Two days before the meeting, new ideas were surfacing about how to boost the bloc’s crisis capabilities. EU officials said leaders could decide to raise the combined lending limit of the temporary EFSF and its successor, the permanent European Stability Mechanism, which France and Germany want introduced a year early, in 2012.


“Neither Nicolas Sarkozy nor Angela Merkel will leave the negotiating table of this summit until there is a powerful deal," Baroin told Canal+ television, saying France was fighting hard to keep its top credit rating.

“A lot depends on what happens Friday, ... on how the response given by the heads of states is received," he said.

A fresh sense of urgency was injected into talks after S&P put the credit ratings of 15 countries, including Germany and France, on review for a downgrade, citing “continuing disagreements among European policymakers on how to tackle the immediate market confidence crisis".

Geithner was due to meet Sarkozy later on Wednesday before flying to the southern French port of Marseille for discussions with incoming Spanish prime minister Mariano Rajoy.

The treasury secretary, whose trip to Europe speaks of the alarm in Washington at the damage the debt crisis could wreak on the US and world economy, said he was encouraged by moves towards a common set of tight budget rules for EU states.

He also stressed the central role in tackling the crisis of the International Monetary Fund and the European Central Bank, which has been reluctant to take decisive steps until governments get to grips with their financial problems.

Van Rompuy has proposed giving the permanent euro zone rescue mechanism the status of a bank that would allow it to access ECB funding, but Germany has opposed the move, saying it would breach a ban on the ECB financing governments.

A German government source said Germany’s net new borrowing could rise beyond the €26.1 billion planned for next year if euro zone leaders move forward the permanent European Stability Mechanism to 2012.

ECB President Mario Draghi, who met Geithner on Tuesday in Frankfurt, has signalled that a euro zone “fiscal compact" could encourage the ECB to act more forcefully. The central bank has been reluctant to buy up debt from distressed euro states more aggressively, arguing that doing so would take pressure off governments to fix their finances.

Before the summit, the ECB is expected on Thursday to cut interest rates and offer ultra-long liquidity operations to support banks, while leaving the door open to further measures if governments agree fiscal reforms.

Rapid movement?

Sarkozy and Merkel want treaty changes to be agreed in March and ratified before the end of 2012. If some countries block treaty change for all 27 EU members, the €17 states could proceed with an agreement on their own.

Van Rompuy says tighter budget oversight sought by Paris and Berlin for the 17-nation euro area could be achieved quickly with only minor tweaks to the EU treaty, which might not require full ratification procedures in many countries.

Rajoy — who will meet Sarkozy and Merkel at a congress of European conservative leaders in Marseille on Thursday — said he would support a new treaty.

However, some other EU governments, notably Britain, Ireland and the Netherlands, are reluctant to amend the EU charter, either due to eurosceptics at home or because they fear losing possible referendums on ratification.

The timing of S&P’s threat late on Monday to downgrade euro zone nations caused anger, with Jean-Claude Juncker, chairman of euro zone finance ministers, labelling it “a wild exaggeration and also unfair" because it failed to take account of an austerity plan by new Italian Prime Minister Mario Monti.

Geithner will travel to Italy late on Wednesday for talks on Thursday with Monti.

S&P went a step further on Tuesday, placing the top-notch rating of the euro zone’s €440 billion ($590 billion) EFSF bailout fund on negative watch since it depends on the creditworthiness of the bloc’s six AAA-rated countries.