EU27 meet to find ways to avoid repeat of debt crisis

European Union heads of government are meeting today hoping to agree on ways to strengthen budget discipline and economic policy coordination and show financial markets that they can prevent a repeat of the euro zone debt crisis.

Leaders of the 27 member states and European Commission will also work on tightening financial regulation to help prevent another global economic crisis, including a levy to ensure banks pay for any future crises.

The EU27 have agreed on a €500-million safety net to help struggling countries that use the euro and a €110-billion aid mechanism for Greece.

But despite repeated denials, they have not faded their concerns that Spain will follow Greece by seeking financial help.

"The turmoil in the sovereign debt markets has cast a serious shadow over financial stability in Europe, which could ... derail the still nascent recovery of the real economy," EU Monetary Affairs Commission Olli Rehn warned on the eve of the EU Summit.

A show of unity is likely during the summit, which will review the findings of a task force set up to look at reforms designed to prevent debt building up, increase cooperation and set up a permanent aid mechanism for countries in debt trouble.

Failure to show solidarity could increase the market nervousness that has helped drive down the euro and shares.

German Chancellor Angela Merkel and French President Nicolas Sarkozy set the tone on Monday by pledging unity to defend the euro from its worst crisis since it was founded 11 years ago.

Sarkozy bowed to German demands for tougher budget rules and accepted euro zone states which persistently breach deficit limits should have their voting rights in the bloc suspended, even if it requires treaty changes.

He also accepted closer "economic government," or greater economic policy coordination, should involve all 27 EU member states and not just the 16 that use the euro, and dropped demands for dedicated euro zone secretariat.

"More than ever, Germany and France are determined to talk with one voice, to adopt common policies, to give Europe the means to met its legitimate ambitions," Sarkozy said.

A decision by Moody's rating agency to cut Greece's debt to non-investment grade on Monday served notice of the need for the EU to remain alert over the debt crisis.

Spain, which has a closely watched bond auction on Thursday, also is a cause for concern although member states say it is not on the agenda of the summit and have denied repeatedly that Madrid is seeking financial help.

Madrid won plaudits from Merkel on Wednesday for announcing labour reforms to try to boost its competitiveness. But financial analysts questioned whether its plans, or pension reforms announced by France the same day, go far enough.

The leaders are expected to press ahead with moves towards Europe's own banking levy after the world's top economies failed to agree on such a tax for an industry widely seen as one of the main culprits behind the global economic meltdown.

Pressure also is mounting for European regulators to publish results of so called ‘stress tests’ on individual banks to restore market confidence and overcome a partial freeze in inter-bank lending. Such tests show banks' ability to withstand liquidity problems.