PARIS — The leaders of Germany and France wrangled Monday to come up with a cohesive plan to save the euro through stricter oversight of government budgets at the start of a week that could decide the fate of the single currency.
French President Nicolas Sarkozy and German Chancellor Angela Merkel want more cooperation among the 17 countries that use the euro, including stricter rules to prevent states from overspending, but they disagree on how to build a tighter union.
Investors seemed optimistic they would iron out their differences at their meeting in Paris on Monday and present a united front at Friday's summit of 27 EU leaders.
European stocks were up again following last week's big gains, while bond yields fell, suggesting investors were more confident of being repaid. Italy's 10-year yield dropped 0.4 of a percentage point to 6.17 percent after the new government agreed a package of austerity and growth measures.
"Christmas may well come early for global markets after this week's meetings," said Shavaz Dhalla, a financial trader at Spreadex.
EU spokesman Amadeu Altafaj Tardio, however, downplayed the expectations, arguing that any market euphoria was premature. "We are not in a position to say that the crisis is over, far from that," he said.
Worries about the stability of the euro reached a high in recent weeks as Italy's bond yield, indicative of the rate it would pay to borrow on markets, jumped to record peaks above 7 percent. That level is considered unsustainable and has eventually forced Greece, Ireland and Portugal to require financial aid. By comparison, bond yields in Germany, Europe's largest and most stable economy, are roughly 2 percent.
But Europe can't afford to rescue Italy, the eurozone's third-largest economy, so the crisis went into high gear in recent weeks when it looked like the country might need a lifeline.
Ahead of Friday's summit, leaders seemed to be zeroing in on building around tighter integration among the 17 euro countries — a crucial first step toward a solution that could trigger emergency aid from the European Central Bank, the International Monetary Fund or some combination, analysts say.
Merkel and Sarkozy agree overall on the need for tougher, enforceable rules that would prevent governments from spending or borrowing too much — and on certain penalties for persistent violators.
However, there appears to be a difference of view on how they should move forward. Merkel wants to change the basic EU treaty to reflect the tougher rules on euro countries and make them enforceable; Sarkozy is not opposed to a treaty change but is resisting giving up more powers to Brussels, especially in the run-up to what is likely to be a difficult election in April.
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.
"There is a real danger that anything agreed this week will be watered down as it goes through the process of approval at national levels and what we end up with is less of a fiscal union more of a strengthened stability pact," said Gary Jenkins, an analyst at Evolution Securities.
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.
Also Monday, Italy's new Premier Mario Monti takes a package of austerity and growth-boosting measures to a skeptical Parliament. Monti is to brief both Parliament chambers on the package, which includes €20 billion ($27 billion) of spending cuts and tax hikes, and €10 billion of measures to boost Italy's anemic growth.
His government agreed Sunday to slap taxes on property and luxury goods, increase the age at which retirees can draw pensions, trim the cost of Italy's political class and give incentives to companies that hire women and young workers.Comment on this story
Italy, whose government 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.
Pylas contributed from London. Raf Casert in Brussels also contributed to this report.