FRENCH PRESIDENT Nicolas Sarkozy and German chancellor Angela Merkel will meet in Paris next week to discuss changes to governance in the euro zone.

The meeting comes amid continuing market volatility driven by concerns about sovereign debt levels and the banking sector.

It was called as Italian economy minister Giulio Tremonti told a parliamentary committee that the Italian government would announce reforms later this month to boost growth and public finances, acknowledging publicly that the government was responding to demands for action from the European Central Bank.

The political manoeuvring came as European stock markets endured another volatile session,which prompted EU regulators to discuss imposing a possible ban on short selling bank shares.

However, US stocks rallied in afternoon trade, following the worst plunge since the bull market began in 2009, as a drop in jobless claims and better-than-estimated corporate earnings tempered concern that Europe’s debt crisis is worsening.

The SP 500 surged 4.6 per cent to 1,172.62 in New York. The gauge had plunged as much as 18 per cent from its 2011 high and yesterday traded at 12.3 times reported earnings, the lowest valuation since March 2009, according to data compiled by Bloomberg. The Dow Jones Industrial Average jumped 422.84 points, or 3.9 per cent, to 11,142.78.

French banks, in particular, came under renewed pressure yesterday as their borrowing costs rose sharply, with some banks reviewing exposure to them.

Shares in Société Générale, which fell 15 per cent on Wednesday, at one point dipped 9 per cent only to recover to close out the session 3 per cent higher.

Analysts said investors are concerned about French banks’ exposure to Italian government bonds and to Greece, along with concerns about France’s public debt.

These worries prompted Bank of France governor Christian Noyer to issue a statement that French banks are solid.

“Their capital levels, boosted by strong equity capital, are adequate and their medium- to long-term financing programmes are being carried out in perfectly satisfactory conditions,” he said.

Mr Sarkozy also announced he would meet Ms Merkel in the French capital next Tuesday to discuss changes in euro zone governance designed to meet challenges posed by the debt crisis. Following an emergency summit on July 21st last, Mr Sarkozy said France and Germany would advance joint proposals in August on improving governance.

Italy, which is also at the centre of the euro zone debt crisis, has also moved to address concerns about its high public debt levels. Italian president Giorgio Napolitano cut short his holidays to meet prime minister Silvio Berlusconi. He also spoke to the opposition in an effort to fast-track emergency austerity measures, said a presidential source.

Mr Tremonti also appealed to deputies to support new austerity measures and a constitutional amendment to enforce balanced budgets.

The ECB again intervened yesterday to buy Italian bonds, although the amounts were reported to be relatively minor.

In a sign of how the debt crisis is pressurising the banking sector, emergency overnight borrowing from the ECB has surged. On Wednesday banks took more than €4 billion of overnight funds from the ECB, the highest since mid-May.

Banks have to pay 2.25 per cent for the money as opposed to 1.5 per cent for regular ECB funding.

FRENCH PARADOX: MERKEL AHEAD OF SARKOZY IN TRUST POLL

FRENCH PEOPLE trust German chancellor Angela Merkel and US president Barack Obama more than their own president Nicolas Sarkozy to tackle economic and financial crises, a poll has found.

The poll, which was published yesterday as shares in French banks continued to slump over fears for the country’s finances, showed 46 per cent of people backed Dr Merkel, 37 per cent backed Mr Obama while just a third of people trust Mr Sarkozy.

The online poll was conducted by Harris Interactive for the French newspaper Le Parisien. It asked people to rate key leaders, institutions and economic entities as bulwarks against further financial and economic crises.

The list included Dr Merkel, Mr Obama and Mr Sarkozy, along with the International Monetary Fund and other more or less well-defined entities – citizens, banks, traders, rating agencies, the G8 and G20, Europe and companies.

Ranked first on the confidence list was “citizens”, second Dr Merkel, third the IMF, fourth “companies”, fifth Mr Obama, sixth “Europe” and seventh Mr Sarkozy. The least trusted category was “trader”, followed by “banks” and “ratings agencies”. The G8/G20 groupings came fourth-last, behind Mr Sarkozy.