France Promises “Powerful” Deal at EU Summit

French and German leaders will not leave this week’s summit until a “powerful” deal is reached to combat the euro-zone debt crisis, Paris said on Wednesday.

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French President Nicolas Sarkozy and German Chancellor Angela Merkel will lay out their plan for a tighter fiscal union at Friday’s European Union summit in Brussels. Their plan would impose mandatory penalties on euro states that exceed deficit targets, in hopes of restoring market trust and stemming the debt crisis.

But though Paris is voicing determination, Berlin is less confident of coming to an agreement at the coming summit. “I have to say today, on Wednesday, that I am more pessimistic than last week about reaching an overall deal…A lot of protagonists still have not understood how serious the situation is,” a senior German official told a pre-summit briefing.

“My pessimism stems from the overall picture that I see at this point, in which institutions and member states will have to move on many points to make possible the new treaty rules that we are aiming for,” he said, speaking on condition of anonymity.

After meeting with French Finance Minister Francois Baroin during a three-day tour of Europe, U.S. Treasury Secretary Timothy Geithner voiced his confidence “in what the president of France and the minister are doing, working with Germany to build a stronger Europe.”

“Neither Nicolas Sarkozy nor Angela Merkel will leave the negotiating table of this summit until there is a powerful deal,” Baroin told Canal+ television.

A deal couldn’t come sooner for banks, as new figures expose ever more severe stress among them, and show just how urgently some need help.

Italian banks had to borrow 153.2 billion euros in emergency liquidity from the European Central Bank in November, according to Bank of Italy data released on Wednesday, up from 111.3 billion euros at the end of October. The figures demonstrate a huge leap in reliance on the central bank, which has almost quadrupled since June when Italian lenders took 41.3 billion euros.

Euro-zone banks took more than $50 billion in the ECB’s first dollar funding operation since the world’s central banks last week agreed to cut their cost — that’s five times the $10 billion forecast.

Germany will reactivate its bank rescue fund at next week’s cabinet meeting, a senior government official said.

ECB policymakers will hold a crucial meeting on Thursday, one day before the EU summit, at which most economists expect them to cut interest rates to 1.0 percent from an already-reduced 1.25 percent, introduce longer-term liquidity tenders for banks, and widen the collateral they can use to borrow from it.

ECB President Mario Draghi has signaled that a euro zone “fiscal compact” could encourage the ECB to act more forcefully. Meanwhile, new ideas are surfacing just two days before the summit about how to boost the euro zone’s crisis capabilities.

EU officials said leaders may decide to raise the combined lending capacity of the temporary European Financial Stability Facility, as well as that of its successor, the permanent European Stability Mechanism, which France and Germany want introduced a year early, in 2012.

However, the German official said he did not foresee both funds running simultaneously. He also echoed Merkel’s objection to issuing joint euro-zone bonds as a longer-term solution.

Details of the Franco-German proposal laid out earlier this week are due to be presented today in a letter to European Council President Herman Van Rompuy, who will chair Friday’s summit.

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

Van Rompuy says tighter budget oversight sought by Paris and Berlin could be achieved quickly with only minor changes to the EU treaty, which might not require full ratification procedures in many countries. Sarkozy and Merkel want treaty changes to be agreed in march and ratified by the end of 2012. If some countries block a treaty change for all 27 EU members, they could pursue an agreement with the 17 euro nations.

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Spanish Prime Minister-elect Mariano Rajoy said he would support a new treaty, but some other EU governments, including Britain, Ireland, and the Netherlands, are reluctant to amend the EU charter.