Merkel heads to Paris in bid to stem contagion

European leaders face a make-or-break weak to fix the Eurozone crisis after the failure of their fourth rescue blueprint sparked intensified concern the 17-nation euro area was on the brink of unraveling.

There are four key meetings this week. German Chancellor Angela Merkel and French President Nicolas Sarkozy will hold talks in Paris today. With a European Union summit in Brussels looming on Friday, US Treasury Secretary Timothy Geithner arrives in Frankfurt tomorrow for talks while the European Central Bank holds a policy meeting on Thursday.

Safeguarding banks, limiting the damage to Italy and Spain and finding additional rescue funds may hinge on the response to Franco-German demands for closer economic integration and tougher policing of fiscal rules. Markets climbed last week as investors looked toward the latest plan to rescue the euro, betting that a new regime of budget rules at the summit may clear the way for more intervention from the ECB.

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

The German and French leaders differ on matters such as the role of the ECB and sanctions for euro-area states that violate deficit rules. The two nations are leading the push for closer economic ties among euro nations and locking in tougher enforcement of budget rules to counter the debt crisis.

Meanwhile, in Rome, the Italian Cabinet proposed a €30bn (£25.8bn) package of emergency economic measures to shore up the country’s finances. Italian Prime Minister Mario Monti is under pressure to reassure markets as a selloff of the country’s bonds sent borrowing costs surging last month.

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