BRUSSELS — Europe's sovereign-debt crisis, which has dragged on for more than two years, is entering a pivotal week, as leaders across the continent converge to prevent a collapse of the euro and a financial panic from spreading.
Expectations are rising that Friday's summit of 27 EU leaders will yield a breakthrough. An agreement on tighter integration of the 17 countries that use the single currency — especially on budget matters — would be seen as a crucial first step. That could trigger further emergency aid from the European Central Bank, the International Monetary Fund or some combination, analysts say.
The coming days "will decide if the euro will survive or not," Emma Marcegaglia, the head of Italy's industrial lobby, Confindustria, said Sunday.
French President Nicolas Sarkozy, German Chancellor Angela Merkel, European Central Bank Chief Draghi, and even U.S. Treasury Secretary Timothy Geithner will star in a 5-day financial drama leading up to the summit.
If the summit is a failure, Sarkozy warned last week, "the world will not wait for Europe."
Sarkozy and Merkel meet in Paris on Monday to unveil a proposal for closer political and economic ties between eurozone countries. While the leaders differ on some of the details, their cooperation has been so tight they have come to be known by a single name — "Merkozy."
The two agree overall on the need for tougher rules that would prevent governments from spending or borrowing too much — and on certain penalties for persistent violators.
"Where we today have agreements, we need in the future to have legally binding regulations," Merkel said Friday.
Merkel wants to change the basic European Union treaty to reflect the tougher rules on eurozone countries and make them enforceable. Even if there is general agreement on Friday, actually putting new rules in place through treaty changes could take more than a year. And many economists fear the new rules alone would not be enough to halt the rise in Europe's borrowing costs.
The hope is that a firm expression of intent, however, would reassure the ECB, so that it can make stronger efforts in the short term. That would give governments time to get their finances under better control and make economic reforms that would improve growth.
The urgency has been heightened in recent weeks as Italy and Spain, the continent's third- and fourth-largest economies, face unsustainably high costs to finance their debts. For example, the yield on 10-year Italian bonds is around 7 percent. Yields above that level forced Ireland, Portugal and Greece to seek bailouts. By comparison, bond yields in Germany, Europe's largest and most stable economy, are roughly 2 percent.
The eurozone is threatened to face an existential situation if it becomes clear over the next few weeks that several member states cannot cover their refinancing needs, or can only do so at suicidal conditions," former German Finance Minister Peer Steinbrueck told the Sunday edition of German tabloid Bild.
"Everything must be done to hinder the Eurozone from breaking up," he said.
Italy, whose sovereign debt is equivalent to 120 percent of the country's annual economic output, needs to refinance €200 billion ($270 billion) of its €1.9 trillion ($2.6 trillion)of outstanding debt by the end of April.
The size of the problems facing Italy and Spain are considered too large for the existing funds available to the European Financial Stability Facility ($590 billion) and the IMF ($389 billion.) To boost the firepower of the IMF, several economists have proposed that the ECB lend to it.
"We are now entering the critical period," the EU's financial chief, Olli Rehn, said last Wednesday.
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