Defining eurozone deal ruled out as Angela Merkel and François Hollande clash

A Franco-German clash over eurozone recovery tactics has ruled out a defining deal to solve the growing economic crisis at the latest EU summit in Brussels.

Eve-of-summit talks in Paris between the eurozone "big two" failed to bridge the gulf between German chancellor Angela Merkel and French president Francois Hollande over the balance between austerity and growth.

The pair agreed on the need for a 130bn euro (£104 billion) "compact for growth" expected to be adopted by all 27 leaders at the summit.

But Germany is resisting the idea of "mutualisation" of eurozone debt - pooling the debt burden to lower the risk. Mrs Merkel wants bail-out nations to meet tough new budget controls first and even then is reported to have ruled out anything more than taking a partial debt burden, saying: "I don't see total debt liability as long as I live."

The stand-off spotlights the key summit question: what strategy now will keep markets calm and give the EU a breathing space to get growth and jobs back on track?

EU officials said one crisis meeting among so many could not solve the problem, but summit chairman Herman Van Rompuy said in a letter to EU leaders: "The challenge for this European council (summit) is, more than ever before, to signal in a clear and concrete manner that we are doing everything required in response to the crisis."

Foreign Secretary William Hague said: "This is just one of a whole string of European meetings that have taken place this year. I think it is wrong to put too great an expectation on any one of those meetings.

"We do want the eurozone to sort out its problems and be able to stand together. Clearly they have a lot of issues to resolve."

Long term plans on the table call for a banking union, a fiscal union and - ultimately - a political union to shore up EU integration. But there are no proposed short-term fixes.

One EU official said: "Various overlapping initiatives are coming together at this summit. There is now clearly a systemic problem of confidence in the euro. Markets want to see a move to fiscal integration and we need to send a credible signal that the eurozone will go for integration, because that commitment, at this stage, would probably do as much to calm markets as throwing more money at the problem."

Another said: "The test of this summit will be, is it the one that turns the corner in restoring confidence in the euro?"

Prime Minister David Cameron, who has irritated some eurozone leaders with repeated calls on them to take the necessary action to solve the crisis, will again be urging the others on, particularly towards a banking union to reinforce the eurozone.

But he will emphasise that the UK will not be taking part.

European Commission president Jose Manuel Barroso said he expected all leaders to agree a "comprehensive package" of economic growth measures, including an increase in the lending capacity of the European Investment Bank to target job-creating infrastructure projects in member states, and a better-focused use of existing EU regional aid funds.

But deeper changes were also needed: "We can break this negative cycle now if we are bold enough to establish a strong and integrated financial framework."

Mr Van Rompuy will use the talks to set out long-term plans, including an effective eurozone "Treasury" to oversee the euro. He says he expected to have a timetable ready by the end of the year of the steps towards full integration, involving treaty changes if necessary.

What he has told leaders he wants, more immediately from this summit is "a common understanding amongst us on the way forward" for full economic and monetary union.

Asked if that would settle jittery speculators, an official said: "We are a bit off-piste, and what we do depends on what the markets expect."

PA