Leading German business groups called on Monday for joint euro zone bond issuance, despite their government's opposition, and the European Central Bank showed its intent to defend Italy and Spain.
The ECB spent a record 22 billion euros ($31 billion) on government debt last week, to try to halt the spread of the euro zone debt crisis.
Spanish and Italian bond yields, which had soared to dangerous levels, fell back as a result of the central bank's support, which marked its first bond purchases for 19 weeks.
The ECB is keen to put the ball back in the court of euro zone governments, but despite some internal opposition stepped into a vacuum until the bloc's rescue fund acquires new powers to intervene in the secondary bond market.
Most experts say the latest measures will only buy some time whereas common bond issuance could solve the currency area's intractable debt crisis by allowing all its members to borrow at affordable rates.
But the idea of so-called Eurobonds has been fiercely opposed by Berlin, which is fearful such a step would push up German borrowing costs and reduce incentives for weaker euro zone members like Greece to reform their economies.
A German government spokesman was emphatic -- German Chancellor Angela Merkel and French President Nicolas Sarkozy will not discuss common euro zone issuance at a meeting in Paris on Tuesday because Berlin does not think it is a good idea.
The German government has said on numerous occasions that it does not believe Eurobonds make sense and that's why they will not play any role at tomorrow's meeting, spokesman Steffen Seibert said.
However, a deepening of the debt crisis over the past weeks, with big member states like Italy, Spain and even France coming under pressure, has convinced some Germans to reconsider, even if top government officials continue to rule it out.
The president of Germany's BGA export association became the first senior industry head to back the idea, telling Reuters all other avenues for fighting the crisis had been exhausted.
The alternative is the markets attack Italy, then France, we lose our AAA rating and then it's our turn. This is a downward spiral that would lead to a worldwide depression, Anton Boerner said in an interview.
What have we achieved then? Boerner said. We'll end up paying three times over. This way we pay just once.
His view was backed by the head of Germany's trade association for small- and mid-sized companies, Mario Ohoven, who said Eurobonds could be introduced with guarantees to cap German liability. Other German trade groups remain opposed.
The head of the center-left Social Democrats, Sigmar Gabriel, also backed the idea, telling German public television station ARD late on Sunday that euro zone countries should be able to raise 50-60 percent of their funding through such joint issues if they agreed to certain conditions.
States that use Eurobonds would have to agree to give up a degree of sovereignty over their own budgets, Gabriel said.
After unveiling tougher austerity plans in return for ECB help, Italian Economy Minister Giulio Tremonti said a common euro zone bond would stop markets forcing high-debt economies in the bloc to the brink. We would not have arrived where we are if we had had the euro bond, he said at the weekend.
GOVERNANCE IN FOCUS
With common debt issuance off the agenda, Merkel and Sarkozy are instead expected to discuss improving economic governance.
Officials have said they could agree to regular meetings of euro zone leaders -- a longstanding French demand -- and enlarge the role of European Council President Herman van Rompuy to make him a spokesman for the euro.
These steps could bring greater policy discipline in the 17-nation bloc, which has regularly sowed confusion in the markets by talking with disparate voices, but are unlikely to assuage concerns about the high debt of certain countries in the bloc.
Both German Finance Minister Wolfgang Schaeuble and Economy Minister Philipp Roesler gave interviews over the weekend in which they spoke out against euro zone bonds.
German media reports have said a working group within Merkel's CDU party has been studying the idea of Eurobonds in greater detail, suggesting some may be open to it. But leading members of the party and other northern European member states, such as the Netherlands and Finland, remain vehemently opposed.
Merkel, whose popularity has sunk to its lowest level in nearly five years according to some recent polls, could face a revolt within her coalition and Germany's broader economic policy establishment if she agreed to joint bond issuance.
Her coalition partners, the Free Democrats (FDP) and the Bavarian Christian Social Union (CSU), are seen as dead-set against the idea.
The leadership of the FDP have set a meeting for Wednesday to discuss their stance on the euro crisis, while the Secretary-General of the CSU, the Bavarian sister party to Merkel's CDU, attacked the opposition SPD for its support of common bonds.
The SPD must say what type of tax increases it wants to raise to get the umpteen billion euros for Eurobonds to aid Greece and other Dolce-Vita countries, Alexander Dobrindt said
in comments to business daily Financial Times Deutschland.
Boerner of the BGA said, however, that Eurobonds may be the only solution that can prevent the markets from launching new assaults on euro zone members.
We must show the markets that we are ready to use the appropriate tools, and that means Eurobonds signed off by Germany, said Boerner. We need Eurobonds with strict conditions attached. We need this and we need it fast.
(Additional reporting by Brian Rohan, writing by Noah Barkin, editing by Mike Peacock)