European central bankers told euro zone governments on Friday not to count on the ECB to solve the single currency bloc's debt crisis alone as the leaders of Germany and France met to plot strategy before a key EU summit.
Pressure on high-deficit euro members like Portugal and Spain has eased slightly over the past week after the ECB bought government bonds in a thin end-of-year market, pushing down the borrowing costs of countries on Europe's southern periphery.
But to prevent further contagion, following their agreement to bail out Ireland last month, European leaders may need to send a strong signal to skeptical investors when they gather in Brussels for a December 16-17 summit.
ECB Executive Board Member Gertrude Tumpel-Gugerell wrote in a column in Austria's Format magazine that the bank's bond buys had been successful because they gave countries time to prepare and decide on budgetary measures.
Meanwhile, Bank of Italy Governor and ECB Governing Council member Mario Draghi told the Financial Times that responsibility for dealing with the crisis ultimately lay with euro zone governments and the ECB could go only so far.
I'm only too aware that we could easily cross the line and lose everything we have, lose independence, and basically violate the (EU) treaty, said Draghi, a leading candidate to replace Jean-Claude Trichet as ECB president.
German Chancellor Angela Merkel and French President Nicolas Sarkozy met on Friday in the southwestern German city of Freiburg to agree a common stance ahead of the EU summit and were due to hold a joint news conference at 1 p.m. (1200 GMT).
Ahead of their meeting, Sarkozy's office voiced support for Merkel's stance against issuing joint euro zone bonds -- an idea pushed by Eurogroup President Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti -- or increasing the size of the bloc's stability fund to stem the crisis.
German coalition leaders who met on Thursday evening rejected the euro bond idea as unacceptable.
There was a broad consensus that Eurobonds as Mr. Juncker has proposed them are out of the question for us, Hans-Peter Dietrich, a leader of the Bavarian Christian Social Union (CSU) in parliament told reporters after the meeting.
EURO STEADIES, SPREADS EDGE UP
The euro, which fell to a 10-week low under $1.30 late last month as the euro crisis deepened, was steady at $1.3260. The risk premiums investors demand to hold Portuguese and Spanish debt instead of German benchmarks edged higher on the day.
Spanish Economy Minister Elena Salgado said in Madrid that she expected the country's cost of borrowing to rise at a bond auction scheduled for next week, but said this was a temporary phenomenon and not alarming.
It's true that we might have to pay a little more for bond issues than we have in the past. For that reason we have said we will reduce the volume until the markets stabilize, she said.
Madrid is due to sell 10-year and 15-year bonds on the same day the EU summit starts next week.
The summit is expected to finalize plans to introduce a permanent rescue mechanism for the euro zone to replace the 750 billion euro European Financial Stability Facility (EFSF) that it set up in May after bailing out Greece.
German demands that the new mechanism include the possibility of so-called haircuts for holders of euro zone sovereign debt has been blamed for exacerbating the crisis.
But ECB Governing Council member Ewald Nowotny said on Friday that it was important for private investors to share the costs of any future bailouts.
I think it is important to have a permanent safety net, a permanent instrument, Nowotny, who also head the Austrian Central Bank, told reporters. I think it is also correct that in this whole European stability mechanism the aspect of private investor involvement is covered.
Irish Finance Minister Brian Lenihan told parliament that Dublin would start tapping an 85 billion euro EU/IMF bailout from early next year to meet its sovereign borrowing requirements.
Data released on Friday showed Ireland's central bank had lent the country's crippled banks nearly 45 billion euros in special funding up until the end of November, a 10 billion euro increase on the prior month. (Additional reporting by Erik Kirschbaum in Freiburg, Sylvia Westall in Vienna, writing by Noah Barkin, editing by Mike Peacock)