Treasury Secretary Timothy Geithner meets French President Nicolas Sarkozy in Paris on Wednesday to press for decisive steps towards resolving Europe's deepening debt crisis as the region's leaders prepare for a crucial summit this week.
Geithner voiced strong support for a Franco-German blueprint for an overhaul of the European Union (EU) treaty during a visit to Berlin on Tuesday, after credit rating agency Standard & Poor's fired a second warning shot at the bloc in 24 hours by threatening to cut the credit rating of its EFSF rescue fund.
Sarkozy and German Chancellor Angela Merkel are due to propose to Friday's EU summit a plan to impose mandatory penalties on euro zone states that exceed deficit targets, with the aim of restoring market trust and preventing the region's deepening debt crisis spiraling out of control.
Details of their treaty reform proposals were due to be presented on Wednesday in a letter to European Council President Herman Van Rompuy, who will chair the meeting of 27 EU leaders.
Geithner was due to meet with French Finance Minister Francois Baroin in Paris early on Wednesday, before holding lunchtime talks with Sarkozy at the Elysee presidential palace.
The U.S. Treasury Secretary, whose trip to Europe has been hailed as a sign Washington views this week's summit as decisive for the fragile global economy, said on Tuesday he was encouraged by moves towards a common set of tight budget rules for EU states.
He also stressed the central role in tackling the crisis of the International Monetary Fund and the European Central Bank, which has been reluctant to take decisive steps until governments get to grips with their financial problems.
ECB President Mario Draghi, who met Geithner on Tuesday in Frankfurt, has signaled that a euro zone fiscal compact could encourage the ECB to act more decisively. The central bank has been reluctant to buy up debt from distressed euro states more aggressively, arguing that doing so would take pressure off governments to fix their finances.
Aware of mounting pressure, Sarkozy and Merkel want treaty changes to be agreed in March and ratified before the end of 2012, once France wraps up presidential and legislative elections in June. If some countries blocked treaty change for all 27 EU members, the 17 euro zone states could proceed with an agreement on their own.
Just hours after the two leaders announced their plan on Monday, Standard and Poor's put the credit ratings of 15 countries, including Germany and France, on review for a downgrade, citing continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis.
Jean-Claude Juncker, chairman of euro zone finance ministers, said he was astonished by S&P's announcement, which he called a wild exaggeration and also unfair because it failed to take account of Italy's new austerity plan.
S&P went a step further on Tuesday, placing the top-notch rating of the euro zone's 440 billion euro ($590 billion) rescue fund, the European Financial Stability Facility (EFSF), on negative watch since it depends on the creditworthiness of the bloc's six AAA-rated countries.
Van Rompuy has proposed giving a bigger, permanent euro zone rescue mechanism the status of a bank that would allow it to access ECB funding, but Germany has strongly opposed the move, saying it would breach a ban on the ECB financing governments.
Van Rompuy said tighter budget oversight sought by Paris and Berlin for the 17-nation euro area could be achieved quickly with only minor tweaks to the EU treaty, that might not require full ratification procedures in many countries.
Spanish Prime Minister-elect Mariano Rajoy -- who due to meet Geithner later on Wednesday at a congress of European conservative leaders in the southern French port of Marseille -- said he would support a new treaty.
However, some other EU governments, notably Britain, Ireland and the Netherlands, are reluctant to amend the EU charter, either due to euroskeptics at home or because they fear losing possible referendums on ratification. ($1 = 0.7472 euros)
(Additional reporting by Michael Shields and Sylvia Westall in Vienna, Catherine Bremer in Paris, Andreas Rinke in Berlin, Tim Castle in London, Editing by Michael Roddy)