France, Germany to Push Crisis Plan

(REUTERS) - The president of the European Commission appealed to EU leaders on Thursday to set aside their differences and unite to rescue the euro from a sovereign debt crisis that is menacing the world economy.

Jose Manuel Barroso was speaking hours before a potentially divisive crisis summit -- the eighth this year -- as Europe's central bankers met in Frankfurt to consider emergency help for banks and the economy.

The summit that we are going to starts tonight in Brussels is indeed a crucial one, Barroso said on arrival at a meeting of European conservative party leaders in the French port city of Marseille, issuing a challenge reminiscent of former U.S. President John F. Kennedy.

What I expect from all heads of governments is that they don't come saying what they cannot do but what they will do for Europe. All the world is watching us and what the world expects from us is not more national problems but European solutions.

France and Germany planned to use the Marseille meeting to lobby for their plan to amend the European Union treaty to toughen budget discipline, which they want to have ready by March. But several countries are skeptical.

The often contradictory views were illustrated by two comments that came within a few hours of one another. France's Europe minister said the fate of the euro was at stake.

What that means ... is that the euro can explode and Europe come apart. That would be a catastrophe not only for Europe and France but for the world, Jean Leonetti told Canal+ television.

The chairman of euro area finance ministers said the 17-nation currency was not at risk.

An overhaul of the euro zone's fiscal rules would boost the chances of the European Central Bank, which was expected to cut interest rates and announce new support measures for banks on Thursday, intervening more aggressively to calm the crisis.

U.S. Treasury Secretary Timothy Geithner, winding up a visit to Europe to urge decisive action, praised Italy's new austerity budget and reform plans and said the world could be encouraged by the euro zone's progress in the last few weeks.

It was essential for European leaders to strengthen their financial firewall to give economic reforms a chance to work, he said after talks with new Italian Prime Minister Mario Monti in Milan.

Ratings agency Standard & Poor's ramped up pressure by threatening a mass downgrade of euro-zone sovereign ratings.

It extended that threat on Wednesday to include the European Union itself, which has had a top-notch AAA rating since the mid-1970s, and large euro-zone banks.

In one glimmer of positive news for stressed euro zone countries, two big financial clearing houses cut the cost of using Italian bonds to raise funds following some easing in the country's bond yields.

MERKEL FURIOUS

French President Nicolas Sarkozy and German Chancellor Angela Merkel had a chance to rally many European leaders behind their plan at a congress of the conservative European People's Party on Thursday in Marseille.

But the EU remains divided over the need for treaty change. Summit chairman Herman Van Rompuy is urging leaders to avoid a laborious full overhaul that could take up to two years and face uncertain ratification. He wants them instead to slip stricter budget enforcement through in a protocol to existing treaties.

This infuriated Merkel and was one reason behind a gloomy briefing by a senior German official on Wednesday, who dampened hopes for a breakthrough and said some leaders and institutions still didn't understand the severity of the crisis.

With many details still to be hammered out, doubts that the leaders can agree on a plan weighed on shares in Asia on Thursday but European stocks were up on hopes of a deal by Saturday morning, while the euro was steady.

G20 and IMF officials denied a media report that the G20 grouping of the world's major economies was preparing a $600 billion lending facility for the IMF to support Europe.

If all 27 EU states do not support more fiscal union by adapting the existing Lisbon treaty, which took eight years to negotiate, then Sarkozy and Merkel want the 17 euro zone countries to go ahead alone with more integration.

Swedish Prime Minister Fredrik Reinfeldt, speaking for a non-euro state, said: We respect that the euro zone wants their own meetings and take part of the responsibility on their own... But we want to stick with the 27 concept of course because all of us are members of the European Union and we want to have our influence. We want to keep the European project together.

But in a sign of how hard it may be to unite all 27 EU leaders behind treaty change, Czech Prime Minister Petr Necas was quoted as saying it was unacceptable to make countries send their budget plans to Brussels before approval by national parliaments. Prague is not in the euro zone.

Sarkozy was due to make a speech at 1230 GMT at the Marseille meeting. He and Merkel are both due to hold bilateral meetings later with Spanish Prime Minister-elect Mariano Rajoy before they head to Brussels.

We need more binding and more ambitious rules and commitments for the euro area member states, Sarkozy and Merkel wrote in a letter to European Council President Van Rompuy, who has made his own proposals for tackling the crisis.

THE ART OF BUILDING A CONSENSUS

The Franco-German plan would slap automatic penalties on countries that overshoot deficit targets and make countries anchor a balanced budget rule in their constitutions. The sanctions could be stopped only if three quarters of euro zone countries are against them.

Not all euro zone countries are comfortable with all the French and German proposals, with Finland opposed to their call for majority votes on major policy decisions.

Finland's view is very clear, our stance is that unanimity is required in decision-making ... and that is the view Finland will promote going forward as well, Finnish Finance Minister Jutta Urpilainen told reporters on Wednesday in Helsinki.

Finland recently held up approval of an expansion of the EU's rescue fund to demand collateral on loans to Greece, one of three euro zone states to receive an EU/IMF bailout.

ECB President Mario Draghi signaled last week that a new fiscal compact was a condition for the central bank playing a greater role in calming the debt crisis.

With financial market doubts hanging over the euro zone's EFSF financial rescue fund, many economists say that the most effective way of getting a grip on the crisis would be for the ECB to buy euro zone government bonds more aggressively.

The ECB's policy-making governing council will announce its policy decisions at 1245 GMT, with economists widely expecting a quarter-point interest rate cut to a record low of 1.0 percent, and moves to give banks longer-term liquidity on easier collateral terms.

(Additional reporting by Leigh Thomas and Terhi Kinnunen; Writing by Leigh Thomas and Paul Taylor. Edited by Richard Meares/Janet McBride)