After a year of acting as firemen rushing from one euro flare-up to the next, European leaders tomorrow will turn their attention to forging a long-term solution to the continent's currency crisis.

Storm clouds remain over the single European currency. The eurozone has been hit by a mass downgrade of its creditworthiness, Greece is suffocating under a mountain of debt, Spain has announced a worse-than-expected budget deficit and France and Italy are looking bleakly at empty coffers and shrinking economies.

Even so, the all-powerful bond markets have been calm since the start of the year, bolstered by faith in the euro's guardian. By throwing open a spigot of cheap credit, the European Central Bank is encouraging commercial banks to lend to Europe's debt-crippled economies - for now.

The summit in Brussels thus provides a rare breathing space for the 27-nation bloc. Many analysts say that if the meeting goes well, the markets will be confident that the European Union is at last fixing the euro's structural problems after so many botched repairs.


The big issue on the table will be the design of a "fiscal pact". It would ensure that the folly of Greek-style overborrowing, in which a single government imperilled every other country sharing the euro, can never happen again.

States which break the rules on the limits of their annual deficit, expressed as a percentage of GDP, would be automatically punished.

But some countries, led by the Netherlands, and with the support of the European Central Bank and the EU's executive commission, want the sanction extended to countries that also bust their overall debt ceiling, not just their annual deficit limit.

This proposal is opposed by France and Italy, which are worried about the erosion of national sovereignty, according to a well-informed source in Brussels, who described the difference as "fundamental".

Another issue to be discussed is whether EU countries which are not members of the eurozone - but which are hugely influenced by its decisions - should have the right to attend summits of the currency club.

Poland is insisting on having a seat and has warned it could block the deal if its demand is not met. France is opposed, arguing that eurozone countries should be able to meet separately.

One idea is to allow Poland to attend whenever an agenda item touches on Polish interests, but this would not be a guarantee of a seat.

The fiscal pact is the key to unlocking money from Germany, the EU's paymaster, for boosting the eurozone's rescue fund so that it becomes a safety net capable of saving bigger economies such as Italy and Spain.

Chancellor Angela Merkel has been under extreme pressure from the International Monetary Fund (IMF), the European Commission and Germany's economic allies to sign the cheque.

According to the German financial weekly Wirtschaftswoche, a €500 billion ($752 billion) kitty called the European Stability Mechanism, due to be operational from July, could be boosted by €290 billion. The top-up would come from handing over a residue lying in a temporary bailout fund that was set up in 2010, it said.

In the background, the Greek crisis is still simmering. At the weekend, the Greek government and creditor banks said they were "close" to a deal on debt forgiveness, which they hoped would be wrapped up in the coming week.

Greece is hoping to get US$100 billion ($121 billion) of its US$350 billion of debt wiped out in order to unlock the next tranche of aid and place its finances on a sustainable footing.

Despite this step forward, Athens angrily rejected German demands, reported on Saturday by the Financial Times, that it surrender budgetary control to Brussels as part of Europe's bailout package.

At the Swiss resort of Davos, where the movers and shakers of world business meet each year, the euro's problems took centre-stage at the weekend, and many speakers were gloomy.

"The eurozone is a slow-motion train wreck," leading economist Nouriel Roubini, a New York University professor, was quoted by Reuters as saying.

He expected Greece and possibly Portugal to quit the eurozone club within the next year, and estimated there was a one-in-two chance that the zone would break up completely in the next three to five years.