Eurozone leaders will seek a bigger financial "bazooka" to battle the debt crisis and mull radical steps towards deeper union with treaty change at a game-changing EU summit opening tomorrow.
"Markets don't give a hoot about treaty change as it's all long-term," said an EU source close to backroom talks ahead of the two-day meeting. "Money is all they care about and we need to convince."
With the entire 17-nation area, even powerhouse Germany, under threat of a ratings downgrade and its third economy, Italy, tipping near the edge, the talks kicking off at 7.30 pm and running through Friday are pivotal to the euro's future.
Prime Minister Lawrence Gonzi will attend the meetings.
As the debt crisis relentlessly spirals, a deal at the previous summit in October to pump up Europe's bailout fund to a trillion dollars -- enough to rescue big economies such as Italy and Spain -- has collapsed due to slumping market confidence.
On a visit to Europe as global concern mounts, US Treasury Secretary Timothy Geithner said today the European Union must erect "the highest possible firewall to avoid contagion".
Italy alone needs 400 billion euros to refinance debt coming due next year, more than is left in the coffers of the EFSF emergency fund after it helped Ireland, Portugal and Greece.
The European Financial Stability Fund now holds only 250 billion euros.
"For people to invest in the EFSF, they need to be convinced they will get their money back," said a senior EU diplomat.
One option to show Europe can save its own is to double the firepower of its so-called anti-crisis "bazooka" by enabling the temporary EFSF to continue lending for a time alongside a 500-billion-euro European Stability Mechanism (ESM), which is to be launched mid-2012, but was originally intended to replace the EFSF.
But Germany does not like that idea, a government source said today.
Another option is for the ESM to morph into a bank, which would then enable it to borrow from the European Central Bank (ECB).
A third possibility would be to funnel EU funds to the IMF which it would channel back in case of need. But Britain is reluctant to see the Washington-based fund set up to help nations in trouble now salvaging a currency.
Whether or not EU leaders come up with a bigger bazooka to protect nations using the single currency, they are expected to agree "steps to make the economic union commensurate with the monetary union", as EU president Herman Van Rompuy put it in a draft report to the 27 nations, leaked on Wednesday.
The stakes are high.
If markets are to regain confidence in the euro and lower borrowing costs, the EU needs to engrave in stone new rules to end repeated breaches of the debt and deficit ceilings already written into the regulations, Van Rompuy says.
The aim would be to agree a "fiscal compact" enabling Brussels to trigger sanctions against suspect budgets even before they go to parliaments -- a notion some say would lead to a democratic deficit.
Under proposals put by Europe's power couple, France and Germany, euro nations would be asked to enshrine strict "golden rule" budgetary discipline in their legislation under the watchful eye of the European Court of Justice.
There are hopes this could unleash the ultimate weapon in the euro fight-back after new ECB chief, Italy's Mario Draghi, recently suggested he could consider market intervention should the eurozone agree a "fiscal compact".
Chancellor Angela Merkel and President Nicolas Sarkozy want treaty change in the interests of a long-term solution to the crisis. "We need to renew the contract between members of the eurozone," they said in a letter to Van Rompuy.
But Van Rompuy says in his report that tighter rules on budgetary discipline can be agreed quickly and simply, without need for cumbersome treaty change.
Leaders merely need to amend a protocol attached to the EU rule-book, the Lisbon Treaty, he said. This would avoid embarking on lengthy fraught referendums required to change the treaty.
However, Van Rompuy said simplified treaty change would be needed if leaders toughen up measures to stop nations dodging sanctions, as has often been the case. That would require a change in voting rules.
While Van Rompuy has hopes of a rubberstamp to his proposals over coffee after dinner, EU diplomats tip a long sleepless night of tough talk.
Merkel's spokesman Steffen Seibert predicted "very challenging and occasionally very difficult talks."
As the 10 nations "out" of the euroarea worry about being sidelined in a "two-speed" Europe, Britain already has threatened to block treaty change unless London receives assurances of protection for its powerful financial sector.