French President Nicolas Sarkozy hosts German Chancellor Angela Merkel on Monday to thrash out details of a plan to save the euro at the start of a pivotal week for the single currency.
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.
Ireland’s Prime Minister Enda Kenny is also to announce a 3.8 billion euro austerity budget on Monday, a day after warning citizens to brace for years of economic hardship during a historic television address.
Merkel and Sarkozy are to meet for a working lunch in Paris, having vowed to propose European Union 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.
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 ECB 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, when an EU summit begins in Brussels and the ECB board meets 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.
Europe’s main stock markets advanced at the start of trading on Monday, with investors reassured by the Italian austerity measures and hopes of a breakthrough this week.
London’s FTSE 100 index climbed 0.56 percent at 5,583.57 points, Frankfurt’s DAX 30 gained 0.93 percent to 6,137.87 points and in Paris the CAC 40 added 1.32 percent to stand at 3,206.67.
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.
Milan’s stock market opened 2.02 percent higher to 15,787 points as investors hailed the approval of the austerity budget.
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.
Eurozone banks meanwhile deposited the biggest amount of overnight funds at the ECB for more than a year on Sunday, official data showed Monday, in a signal of banks’ wariness of lending to each other.
Banks put 332.71 billion euros on deposit for 24 hours at the European Central Bank, the highest amount since June 2010.