US Treasury Secretary Timothy Geithner voiced confidence yesterday that the European Union would find a way out of its debt crisis when he met eurozone leaders ahead of a crucial EU summit in Brussels.

Neither Merkel nor Sarkozy will leave the table without an agreement

“I assessed how important it is for the US and countries around the world that Europe succeed,” Geithner said after talks with French Finance Minister Francois Baroin in Paris. “I’m confident they will succeed.”

Geithner, who was meeting leaders including French President Nicolas Sarkozy ahead of today’s summit, said he wanted to “make sure there is a sufficient strong firewall in place” to stop the crisis spreading.

“We exchanged views on the need for the highest possible firewall to avoid contagion,” Baroin said, after laying out French-German proposals aimed at bolstering eurozone discipline to be examined at the Brussels summit.

Baroin said ahead of his meeting with Geithner that the situation was “serious” and that the eurzone needed to create a “confidence shock” after months of what the markets perceive as leaders’ torpor.

“The crisis we’re going through is unprecedented, there’s no doubt about that,” Baroin told Canal Plus television.

“States must quickly consolidate their public finance, reduce their deficits, stabilise the zone, modify governance,” he said.

Baroin said that in Brussels “neither Angela Merkel nor Nicolas Sarkozy will leave the table without a strong agreement being signed”.

General firmness on financial markets yesterday reflected a sentiment of some optimism about the outcome.

EU leaders are under intense pressure to convince markets they can come up with a rapid rescue plan for the eurozone following the threat of possible debt downgrades by ratings agency Standard and Poor’s.

S&P’s announcement came hours after Sarkozy and German Chancellor Angela Merkel announced their plan for a new EU treaty and tougher budgetary rules, including sanctions for lax eurozone economies, after crisis talks on Monday.

The debt warning means that Germany, France and other eurozone countries could lose their top-notch credit ratings without urgent action and their borrowing rates would probably rise.

However, Germany attracted strong interest at a bond auction yesterday.

Meanwhile the EU’s EFSF bailout fund, also the target of the downgrade warning because it is backed by the ratings of eurozone countries, said it intended to issue short-term paper by the end of this year.

Eurozone nations are holding intensive debt crisis talks to find ways to bolster their financial firewall ahead of the summit, diplomatic sources said on Tuesday.

One option being considered is to allow two rescue funds to exist temporarily side-by-side instead of just the single bailout fund currently in existence – the European Financial Stability Facility, they added.

A temporary rescue fund set up after the crisis in Greece, the EFSF was to be replaced by a permanent rescue pot, the European Stability Mechanism, expected to be given shape mid-2012.

But the EFSF, which was set up in May last year to protect vulnerable eurozone nations, could also see its debt downgraded.

Its current triple-A rating enables the fund to raise financing in the bond market with much lower interest rates than bailed-out nations would get on their own.

Geithner arrived in Paris from talks in European economic powerhouse Germany on Tuesday, including with European Central Bank chief Mario Draghi in Frankfurt and German Finance Minister Wolfgang Schaeuble in Berlin.

In Brussels, EU president Herman Van Rompuy and Commission chief Jose Manuel Barroso will raise the controversial idea of issuing so-called eurobonds backed by all eurozone members, which Germany strongly opposes.

European stocks and the euro rallied in early trading yesterday following gains for stocks across Asia, on optimism that the EU summit would result in a big-bang breakthrough.

“This slightly better tone is in line with cautious optimism that the EU summit could lay the groundwork for a solution for the eurozone crisis,” said Rabobank analyst Jane Foley.

After Paris, Geithner will travel to the southern French city of Marseille where Europe’s conservative leaders are gathering before the summit and hold a bilateral meeting with Spain’s Prime Minister-elect Mariano Rajoy.

His final stop was expected to be in Italy, in the eye of the eurozone storm, where he will hold talks with Prime Minister Mario Monti.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.