European leaders will take another run at fixing the debt crisisthis week after the failure of their fourth rescue blueprintsparked intensified concern the 17-nation euro area was on thebrink of unraveling.

German Chancellor Angela Merkel and French President NicolasSarkozy will hold talks in Paris today starting at 1:30 p.m. overlunch. With a European Union summit in Brussels looming Dec. 9,U.S. Treasury Secretary Timothy Geithner arrives in Frankfurttomorrow to prod political leaders and the European Central Bankholds a policy meeting Dec. 8.

Safeguarding banks, limiting the damage to Italy and Spain andfinding additional rescue funds may hinge on the response toFranco-German demands for closer economic integration and tougherpolicing of fiscal rules. Markets climbed last week as investorslooked toward the latest plan to rescue the euro, betting that anew regime of budget rules at the summit may clear the way for moreintervention from the ECB.

“The door should swing open for the ECB to become moreaggressive,” Erik Nielsen, global chief economist at UniCredit SpA,wrote in a note to clients yesterday. Stepped-up bond purchases bythe ECB will “restore a degree of sanity.”

The German and French leaders differ on matters such as the roleof the ECB and sanctions for euro-area states that violate deficitrules. The two nations are leading the push for closer economicties among euro nations and locking in tougher enforcement ofbudget rules to counter the debt crisis.

'Inconceivable'

Sarkozy speechwriter Henri Guaino today criticized Merkel'sproposal that fiscal scofflaws be hauled in front of judges.

“It is inconceivable that the European Court of Justiceoverrules a budget that has been voted in France, or in Germany orItaly,” Guaino said today on RMC radio.

In Rome, the Italian Cabinet proposed a 30 billion-euro ($40billion) package of emergency economic measures to shore up thecountry's finances. Italian Prime Minister Mario Monti is underpressure to reassure markets as a sell-off of the country's bondssent borrowing costs surging last month.

“Together we will make it,” Monti told reporters in Rome afterthe Cabinet meeting. “I wanted to send you a message of seriousconcern but also of great hope.”

Spanish and Italian 10-year bonds extended last week's rally onoptimism that political leaders may find the right recipe forcalming markets. Investors brushed off the most comprehensiveeffort, which was produced at a six-day summit marathon inOctober.

Spread Narrows

The risk premium between Italian and German 10-year notesnarrowed 52.2 basis points today to 3.99 percentage points, thesmallest gap since Oct. 31. The euro climbed 0.3 percent $1.3429 at12:18 p.m. in Frankfurt, while the MSCI All Country World Indexclimbed 0.3 percent as of 11:50 a.m., adding to an 8.4 percentrally last week.

In a speech to German parliament on Dec. 2, Merkel invoked amarathon analogy to the crisis, pushing her proposal to enforcestricter budget rules through EU treaty changes and ruling outcalls for quick action such as jointly issued euro bonds orestablishing the ECB as a lender of last resort.

ECB President Mario Draghi signaled last week that the centralbank could step up its efforts if euro-area governments forge acloser fiscal union. Should a “new fiscal compact” emerge, “otherelements might follow,” Draghi said.

The ECB is already lending banks as much money as they ask forin an attempt to stimulate the flow of credit to households andbusinesses. Draghi said Dec. 1 that the bank's bond purchases aimsolely to ensure its rates are transmitted on markets, not tocreate new money or “subsidize governments.”

ECB Cut Seen

The ECB unexpectedly cut its benchmark interest rate by aquarter point to 1.25 percent last month, and all but one of 26economists in a Bloomberg News survey predict another quarter-pointreduction when policy makers meet on Dec. 8.

Geithner will meet with political leaders and central bankers onhis visit this week. The Treasury Secretary has pressed Europeanleaders to take stronger action to stave off the crisis, whichTreasury officials have said endangers the U.S. recovery.

Merkel will also continue to press her case when she meetsSpain's Prime Minister-elect Mariano Rajoy at a European partymeeting on Dec. 8 in Marseille, France. The German leader will askhim to support her plan to save the euro at the upcoming summit, ElMundo newspaper reported yesterday.

“A successful meeting next weekend suggests a better mood allaround as we go into the holiday season,” Jim O'Neill, chairman ofGoldman Sachs Asset Management, wrote in a note to clients. “Afailed meeting suggests anything but.”

Bloomberg News

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