Divided euro leaders bank on closer ties – but David Cameron fears UK will be left out in the cold

PM will put down a marker but is unlikely to make specific demands

As Europe's leaders gather in Brussels today, much of David Cameron's attention will be on a small but economically vital portion of his own nation's capital.

British ministers fear that London, Europe's biggest financial centre, might lose out to Paris and Frankfurt when future rules are decided if the 17 euro members act as a caucus after banking union goes ahead.

But Mr Cameron intends to adopt a conciliatory approach after his demands for special protection for the City were rejected at an EU summit last December and he vetoed a new "fiscal compact". The Prime Minister will put down a marker at today's talks in Brussels but is unlikely to make specific demands until the details of the banking union emerge later this year.

Yesterday, it emerged that the 27 EU members are deeply divided about how banking integration would work. Britain and Romania are in favour of a banking union but will not join it. France, Austria, Belgium and Cyprus want two tiers – one for the eurozone and one for the 27 EU nations. Others, including Luxembourg, would only support the idea if all 27 join it, while the Czech Republic, Denmark, Finland, Hungary, Lithuania, Netherlands and Sweden are against the plan.

The biggest divisions are expected over how much power eurozone countries should surrender to Brussels over their national spending and debt levels.

Angela Merkel, Germany's Chancellor, goes into the summit having emphatically set out her own position yesterday.

In a keynote and outspoken address to the Berlin parliament, Ms Merkel angrily dismissed increasing calls from within the EU for the swift introduction of eurobonds to pool debt across its 17 members.

"We are not going to permit them," Ms Merkel told MPs. "I consider them to be economically wrong and counterproductive," she added.

Arriving in Paris last night for a crucial eve-of-summit dinner with François Hollande, France's new Socialist President, Ms Merkel said: "I say we need more Europe and I think we are in agreement there. We need a Europe that functions effectively, markets are looking for this, and a Europe where countries help each other."

The Chancellor's increasingly vehement opposition to the idea of sharing eurozone debt has put her on a collision course with many of her European partners, including Mr Hollande. The French President – who is expected to trumpet a shift away from "collective austerity" – believes that eurobonds should be an EU priority for helping countries like Italy and Spain bring their borrowing costs down. Yet Ms Merkel's speech to parliament suggested that she was more against the idea than ever.

She was scathing about the prospects for today's summit and a document by European Council President Herman Van Rompuy urging debt pooling: "There will again be much too much talk about possible ideas for common liability and much too little said about better controls and structural measures," she insisted. Ms Merkel said she expected to have "controversial discussions" in Brussels and reiterated her conviction that stronger competitiveness was the prerequisite for sustained growth. "It is imperative that we don't promise things that we cannot deliver," she said to loud applause.

Germany, she said, would continue to campaign for the Europe-wide financial transaction tax which was rejected outright by Britain and prompted a fallout between Ms Merkel and Mr Cameron when it was first proposed earlier this year. Despite all the tensions, EU diplomats say the meeting cannot afford to fail. They predict the summit will try to reassure the financial markets by endorsing banking union in principle and approving a €130bn "compact for jobs and growth".

The 27 leaders will discuss a report, "Towards a Genuine Economic and Monetary Union," by Mr Van Rompuy; José Manuel Barroso, the European Commission President; Mario Draghi, President of the European Central Bank; and Jean-Claude Juncker, who chairs the 17-strong Eurogroup.In a concession to Britain, it says further integration must be compatible with the single market. But Nick Clegg, the Deputy Prime Minister, said yesterday: "The risk of discrimination [against the UK] is real. The protection of the single currency must not translate into protectionism within the single market."

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