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.

'Inconceivable'

Sarkozy speechwriter Henri Guaino today criticized Merkel's proposal that fiscal scofflaws be hauled in front of judges.

“It is inconceivable that the European Court of Justice overrules a budget that has been voted in France, or in Germany or Italy,” Guaino said today on RMC radio.

In Rome, the Italian Cabinet proposed a 30 billion-euro ($40 billion) 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 sell-off of the country's bonds sent borrowing costs surging last month.

“Together we will make it,” Monti told reporters in Rome after the Cabinet meeting. “I wanted to send you a message of serious concern but also of great hope.”

Spanish and Italian 10-year bonds extended last week's rally on optimism that political leaders may find the right recipe for calming markets. Investors brushed off the most comprehensive effort, which was produced at a six-day summit marathon in October.

Spread Narrows

The risk premium between Italian and German 10-year notes narrowed 52.2 basis points today to 3.99 percentage points, the smallest gap since Oct. 31. The euro climbed 0.3 percent $1.3429 at 12:18 p.m. in Frankfurt, while the MSCI All Country World Index climbed 0.3 percent as of 11:50 a.m., adding to an 8.4 percent rally last week.

In a speech to German parliament on Dec. 2, Merkel invoked a marathon analogy to the crisis, pushing her proposal to enforce stricter budget rules through EU treaty changes and ruling out calls for quick action such as jointly issued euro bonds or establishing the ECB as a lender of last resort.

ECB President Mario Draghi signaled last week that the central bank could step up its efforts if euro-area governments forge a closer fiscal union. Should a “new fiscal compact” emerge, “other elements might follow,” Draghi said.

The ECB is already lending banks as much money as they ask for in an attempt to stimulate the flow of credit to households and businesses. Draghi said Dec. 1 that the bank's bond purchases aim solely to ensure its rates are transmitted on markets, not to create new money or “subsidize governments.”

ECB Cut Seen

The ECB unexpectedly cut its benchmark interest rate by a quarter point to 1.25 percent last month, and all but one of 26 economists in a Bloomberg News survey predict another quarter-point reduction when policy makers meet on Dec. 8.

Geithner will meet with political leaders and central bankers on his visit this week. The Treasury Secretary has pressed European leaders to take stronger action to stave off the crisis, which Treasury officials have said endangers the U.S. recovery.

Merkel will also continue to press her case when she meets Spain's Prime Minister-elect Mariano Rajoy at a European party meeting on Dec. 8 in Marseille, France. The German leader will ask him to support her plan to save the euro at the upcoming summit, El Mundo newspaper reported yesterday.

“A successful meeting next weekend suggests a better mood all around as we go into the holiday season,” Jim O'Neill, chairman of Goldman Sachs Asset Management, wrote in a note to clients. “A failed meeting suggests anything but.”

Bloomberg News

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