European Union leaders will make a new attempt this week to convince financial markets they can contain a debt crisis by agreeing how to tighten economic policy coordination and strengthen budget discipline.

The 27 EU member states and the executive European Commission will also set out plans for boosting economic growth and creating jobs at a summit on Thursday, three days after the leaders of Germany and France discuss strategy in Berlin.

A show of EU unity would help persuade markets the bloc has a common response to the worst crisis to hit the 16-country euro zone since the single currency was created 11 years ago and can prevent Greece's debt problems spreading to other countries.

Our priority is putting order into our public finances. We need fiscal consolidation and a new financial stability culture in Europe, European Commission President Jose Manuel Barroso said after meeting German Chancellor Angela Merkel on Friday.

There is new awareness in Europe that rules have not been respected and must now be respected. Circumventing the rules ... is putting at risk our collective economic future. We need to move in the opposite direction. We need to strengthen our rules and the way the EU runs its economy.

Failure to show solidarity could increase the nervousness on markets that has helped drive down the euro and shares globally, and increased worries that countries such as Spain and Portugal could follow Greece into debt payment trouble.

Agreement on an aid package for Greece worth 110 billion euros ($132.4 billion) and a safety net for other euro zone countries worth 500 billion euros has gone some way to calming investors' worries, at least in the short-term.

A task force under EU President Herman Van Rompuy has started work on reforms to reinforce budget rules and changes are planned to tighten financial regulations after the global economic crisis [ID:nLDE65A0O5]


But EU leaders have often appeared slow to react during the crisis and investors still have medium- and long-term concerns. They want to see how the rescue mechanisms will work in practice and whether the bloc is truly making a united stand.

Policymakers in the EU have been rumbled. They've regularly fallen behind the curve and their announcements have often been full of smoke and mirrors, said Philip Whyte of the Center for European Reform think tank.

The markets don't see how the southern European states are going to get out of the predicament they are in.

The tone for the summit could be set by Monday's talks between Merkel and French President Nicolas Sarkozy, who lead Europe's largest economies. Both want to protect the euro and improve Europe's economic performance but disagree how to do so.

The German Finance Ministry has circulated a nine-point plan demanding stiffer sanctions against governments that flout European fiscal rules, including suspending repeat offenders' EU voting rights, and an insolvency procedure for states.

Sarkozy has avoided the rigor sought by Berlin, and wants an economic government for the euro zone, with a dedicated secretariat to coordinate economic policy and focus on rebalancing the European economy and boosting growth.

Sarkozy and Merkel postponed a meeting last week at the last minute, a move widely seen as a sign of how far relations have deteriorated between countries long seen as the EU's engine.

They went some way to assuaging concerns by issuing a letter to Barroso calling for faster financial reform and an EU-wide ban on some forms of trading in certain shares and state bonds, but doubts remain about their relationship.

It's hard to see that France and Germany will be singing from the same song sheet, Whyte said.


EU leaders want to address concerns that the debt crisis will spread to EU states that do not use the euro but have big deficits or debts such as Hungary and Britain.

They face hostility to important parts of the drive toward closer budget surveillance from British Prime Minister David Cameron, who is attending his first EU summit.

British Foreign Secretary William Hague said on Sunday the country's new coalition government remained firmly opposed to proposals that EU countries, including Britain, should give Brussels an early sight of their budget plans.

That's not a proposal that we can support, Hague told the BBC. The British budget must be presented to the British parliament and that is ... the position we will maintain.

Hague said he hoped the euro zone would survive current financial turmoil. It's in our national interest for those who do join the euro to be OK, he said.

Austerity plans announced by some European governments also face the threat of labor unrest over fears that such moves will limit growth and cause job losses.

The EU leaders will try to address these concerns when agreeing on their Europe 2020 strategy for the next decade to cut unemployment, which was 9.7 percent in the EU in April, and double annual growth potential to 2 percent.

(Editing by Matthew Jones)

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