Divisions ahead of EU summit

German Chancellor Angela Merkel said the situation in Europe was "serious" on the eve of a crucial EU summit, but leaders were determined to take steps to ensure the continued strength of their single currency.

Speaking at the Elysee Palace in Paris ahead of a working dinner with French president Francois Hollande, Ms Merkel said: "We will talk about the political future of the economic and monetary union."

"I say we need more Europe and I think we are in agreement there," she added. "We need a Europe that functions effectively, markets are looking for this, and a Europe where countries help each other."

Ms Merkel said she hoped the summit would produce a pact to boost economic growth in Europe.

Earlier, however, she brushed aside increasingly shrill calls from Spain and Italy for emergency action to lower their soaring borrowing costs.

The president of debt-laden Greece will travel economy class to the summit. A source familiar with the travel plans of the Greek delegation, led by 83-year-old President Karolos Papoulias, said they would travel economy on a regular Aegean Airlines flight to Brussels.

The show of frugality follows a 30-percent pay cut for ministers in the new ruling coalition - a response to public anger over government waste and privilege as ordinary Greeks bear the brunt of punishing cuts demanded by the EU and IMFin exchange for a rescue.The president has already given up his €280,000 salary.

European Union leaders go into the two-day meeting more openly divided than at any time since a still-widening debt crisis erupted in early 2010 after Greece revealed its deficit and debt were far higher than reported.

Addressing parliament in Berlin, Ms Merkel accused top European Union officials of putting the cart before the horse by proposing common euro zone debt before EU controls are in place on national budgets and economic policies.

"I fear that at the summit we will talk too much about all these ideas for joint liability and too little about improved controls and structural measures," she said, renewing her mantra that even Europe's strongest economy must not be overburdened.

Ms Merklel left the door ajar to eventual joint debt issuance but offered no short-term measures to ease the crisis, now in its third year.

But she insisted that Berlin's European partners must first commit to giving EU institutions the power to override their budgets and make them change policy before there could be any shared liability for Europe's debt.

"Joint liability can only happen when sufficient controls are in place," she said in a less definitive rejection of common euro zone bonds than she made behind closed doors yesterday, when she told lawmakers she did not expect to see total shared debt liability in her lifetime.

Rome and Madrid have seen their borrowing costs spiral to a level which for Spain at least would not be sustainable as it battles to recapitalise banks ravaged by a burst property bubble and cut a towering government deficit.

Spanish prime minister Mariano Rajoy said he would ask other EU leaders to allow the bloc's bailout funds or the European Central Bank to stabilise financial markets.

Speaking in parliament in Madrid, Mr Rajoy warned that Spain would not be able to finance itself indefinitely with 10-year bond yields near seven percent.

"The most urgent issue is the one of financing. We can't keep funding ourselves for a long time at the prices we're currently funding ourselves," he told parliament.

The EU's divisions have been more openly displayed since socialist Francois Hollande ousted Nicolas Sarkozy as French president, putting an end to the Franco-German "Merkozy"

leadership duo and challenging Berlin openly to move away from austerity, promote economic growth and mutualise Europe's debts.

Rome and Madrid, now first in the financial markets' firing line, have muscled into the traditional Franco-German axis.

The four leaders held an unusually discordant news conference in Rome on Friday. The pair will try to repair the damage at a working dinner in Paris tonight after the big four countries' finance ministers met late yesterday to try to narrow differences.

French officials said those talks, and a conference call of all 17 euro zone finance ministers today, focused on specific instruments to ease short-term pressure on markets,

such as altering the preferred creditor status of the bloc's future bailout fund, the European Stability Mechanism (ESM).

Berlin, which originally insisted that ESM loans must be senior to private bondholders to protect taxpayers from losses in any debt restructuring, hinted at flexibility on the rule, which has put investors off buying Spanish bonds.

In Rome, Italian prime minister Mario Monti said yesterday he would not simply rubber stamp conclusions at the EU summit and was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets.

With Mr Hollande's support, Mr Monti is pushing for the euro zone's rescue funds, backed by the European Central Bank, to be used to bring down Spanish and Italian borrowing costs.

Mr Rajoy would settle for that or the ECB doing the same job by reviving its bond-buying programme. The proposal has run into stiff opposition from Germany, the euro zone's effective paymaster, and has been rejected by Jens Weidmann, the powerful head of the German central bank, the Bundesbank.

Stock markets perked up last week on hopes that the 20th EU summit since the start of the crisis would come up with dramatic measures.

Investors have since thought better of that view.One senior euro zone source said there would be no short-term decisions for market consumption at the summit - no direct recapitalisation of banks by the ESM, and no bond buying.

The euro fell today, with many investors out of the markets before the Brussels meeting.

ECB chief economist Peter Praet gave markets some cheer by telling Financial Times Deutschland there was no doctrine that euro zone interest rates could not fall below the record low of 1 per cent.

Reuters