The saga of the euro debt crisis continues. The heads of state and government leaders of all 27 EU members arrived in the Belgian capital, Brussels, early Sunday for an initial session. After that, the 17-member euro group of countries that share the common currency will have their own meeting in the afternoon.

Between the two meetings, French President Nicolas Sarkozy said that "broad agreement" was reached to ramp up the firepower of the eurozone rescue fund, European Financial Stability Facility (EFSF).

Sarkozy, appearing alongside German Chancellor Angela Merkel, said "a quite broad agreement is taking shape on the reinforcement of the EFSF," the 440-billion-euro ($611 billion) fund set up to defend the euro single currency.

"I cannot let you say that things have failed," Sarkozy told reporters. "Capitals are facing an unprecedented financial crisis ... We are aware of the responsibility on our shoulders."

"Some of the things we are fighting originated decades ago," Merkel added. "Wednesday will not be the last step we will have to take."

Berlusconi needs to get Italy's finances in order - and pronto

The pressure on European leaders is enormous to finally get a grip on the euro crisis. If Europe's leaders fail, the currency union could collapse, and a banking crisis could follow that would dwarf the Lehman Brothers fiasco, which triggered the global 2008 recession.

The information seeping out of the inner circles suggests that the differences among the participants are waning in the face of the scenario mentioned above.

Italy in the spotlight

In the round of 27, the agenda is focusing on the precarious situation of European banks. By now, everybody realizes that Greece is hopelessly over-indebted. Its creditors will most likely have to write off at least half of what is owed them.

Officially, this is all supposed to happen voluntarily, but a lot of persuasion is necessary because there is nothing voluntary about it.

Writing off debt means losses for banks, especially when other, larger countries are threatened.

Capital injections of more than 100 billion euros are meant to keep banks afloat and protect them from market turbulences through the middle of next year. Particular attention is being paid to Italy with its gigantic mountain of debt, totaling some 120 percent of gross domestic product.

Italian Prime Minister Silvio Berlusconi held talks on Saturday evening and Sunday morning with EU representatives about the finances of his country. He is expected to pursue a more rigorous consolidation of government finances – something the EU has seen little of in the past.

'Leverage' - the magic word

While the recapitalization of banks is an EU-wide effort, the EFSF bailout fund is a task for the 17 eurozone members. The rescue fund will be too small if countries like Spain or Italy begin having serious problems.

Germany is strictly opposed to expanding the fund beyond the 440 billion euros already agreed on. To get around this ceiling, the financial experts have come up with the so-called 'leverage mechanism.'

France, meanwhile, has shelved its idea to give the EFSF a banking license, which would allow it unlimited access to central bank money. Germany and other countries were concerned that permitting countries to refinance themselves by printing money would lead to uncontrolled inflation.

The options

What's left are two options. One entails making the EFSF a kind of limited liability insurance fund, which would guarantee a portion of the face value of government bonds. This way, the volume of the fund could be tripled or quadrupled.

France and Germany have not seen eye to eye on the rescue fund

The other possibility is creating a separate fund in which the International Monetary Fund would also play a role, thus internationalizing the risks onto the financial shoulders of other countries, like China. A combination of both models is also feasible. Critics, however, are concerned that the risk to taxpayers would climb as well; something the German government denies.

Merkel wants changes to EU treaties

German Chancellor Angela Merkel, as recently as Sunday morning, has suggested changing EU treaties to avoid the recurrence of a debt crisis. She wants to see more EU-wide coordination in finance, budget and economic policies.

In Merkel's opinion, the EU needs better tools to intervene when a country does not have its financial household in order.

But Merkel has also warned against having overly optimistic expectations. Decisions will not be made until Wednesday, she said.

A second summit became necessary – not only due to Franco-German differences about the EFSF – but also because the chancellor did not have a comprehensive mandate from the budget committee of the German parliament.

In an upcoming interview in the German news magazine Der Spiegel, the head of the eurozone group, Luxembourg's Jean-Claude Juncker, criticized what he called the "disastrous external presentation" of the European Union and the "slow organizational pace of Berlin."

Author: Christoph Hasselbach / gb

Editor: Ben Knight