The key questions

As European leaders sit down in Brussels, they are entering a high-stakes summit to reach a final deal to end the Eurozone debt crisis and calm international markets. If they fail to reach a decisive agreement, there are risks the single currency zone could implode, with dramatic repercussions on the world economy from Berlin to Beijing. Markets did rally earlier in the week on the hope that the leaders would agree to the proposal hammered out in Paris between Germany and France on Monday.

There, French President Nicolas Sarkozy and German Chancellor Angela Merkel agreed to a tough fiscal union for the Eurozone, with strict rules for membership.

The quandary they face, though, is that few existing Eurozone nations — France included — would meet those criteria at present. And any changes to the European Union treaty or, indeed the Eurozone membership itself, would require approvals through either parliamentary votes or referendums in individual member nations.

That will take time, and time is a commodity the EU simply doesn't have at present.

Yesterday, EU leaders came under fresh pressure to strike a comprehensive deal after a warning from Standard & Poor's that the crisis threatens the credit rating of 15 of the 17 Eurozone members.

Any such action by S&P could cripple the European Financial Stability Rescue Facility — the fund set up between the International Monetary Fund, the European Union and the European Central Bank to bailout debt-ridden national governments. So far, Greece, Ireland and Portugal have received bailouts totalling more than €300 billion (Dh1.1 trillion). The downgrade could cripple the ESRF fund as it depends on the AAA ratings of Europe's most prosperous nations to borrow at preferential rates.

S&P is threatening to cut the ratings of Germany, Austria, Belgium, Finland, France, Ireland, Luxembourg, the Netherlands, Estonia, Italy, Malta, Portugal, Slovakia, Slovenia and Spain. Greece's credit rating is rated as junk.

1 WHAT DO MARKETS EXPECT?

Investors hope leaders will at least come up with what would be a roadmap towards Eurozone fiscal union, a framework to control budgets and debt, including strict sanctions for spendthrift states and the ability to bring them to court.

"They will have some movement to close fiscal ties at this week's summit. Maybe not full agreement, but agreement on the direction they are going in," said Huw Worthington, a sovereign debt analyst with Barclays Capital.

But investors also want immediate action with a show of muscle after recent disappointment over failed attempts to leverage the Eurozone's rescue fund to €1 trillion (Dh4.9 trillion). "Markets have priced in a positive result so there is a risk of disappointment," said Nick Kounis, head of macroeconomic research at ABN Amro, adding that a show of strength was needed.

This show of strength could come in the form of a signal from the European Central Bank that it will continue to support markets, either through lending to banks or buying state bonds. Leaders could also agree to give more resources to the International Monetary Fund, possibly by allowing Eurozone central banks to contribute funds to the IMF, which would then lend money to troubled Eurozone states. A wide range of figures is circulating, but there is hope that total commitments could exceed €300 billion.

2 WHAT CAN POLITICIANS DELIVER?

Any comprehensive deal will be based on agreement between France and Germany. But others may struggle to accept Germany's demands to take errant Eurozone countries to the European Court of Justice, the EU's highest court. They will also be reluctant to surrender autonomy over their national budgets.

Germany also wants deeper fiscal union to be inscribed in EU law via changes to the EU's Lisbon treaty, but there is resistance among a number of Eurozone and non-Eurozone states to such changes, even limited ones. Instead, negotiators are trying to persuade Germany that most of what it wants for deeper fiscal integration can be achieved without treaty changes, although the ability to take countries to court would not be among the options.

"You may well get agreement that treaty change is being looked at without getting agreement on the text," said one EU official with direct knowledge of the negotiations. "It was never on the cards that it would be sorted in detail." He said EU leaders could issue a statement today, "that we need to look at reinforcing fiscal discipline or the excessive deficit procedure at the treaty level."

3 WHAT ARE THE OPTIONS?

By adopting highly intrusive measures to oversee each other's finances, European Union leaders hope to persuade a reluctant European Central Bank to intensify its response to the crisis.

The fate of the euro may well rest on a big new intervention by the ECB, but the issues are as contentious as they are complex. Simply put, however, the overbearing pressure on Italy and Spain is such that the single currency might break up if the leaders cannot settle on a new grand bargain to save it. The aim is to bind everyone into the same plan by the time the leaders leave Brussels tomorrow night.

4 WHY MERKEL AND SARKOZY?

Nothing happens in the Eurozone without the German and French leaders agreeing to it first.

In Paris on Monday, the two made several proposals including an automatic punishment for any government that allows its deficit to exceed three per cent of GDP, required balanced budget legislation in Eurozone member nations, making Europe's bailout fund permanent, rather than ending it in 2013, and better management through more regular meetings until the crisis is over.

5 WHAT ABOUT other LEADERS?

Agreement between Germany and France is a necessary but insufficient condition for a wider pact. Bringing everyone else on board is difficult, not least because 25 other countries are involved but also because their interests vary widely.

EU leaders will have to settle new strains between the 17 euro countries — the ‘ins', as they are known — and the ten countries that don't use the currency, now known as the ‘outs'. The outs fear they will be left behind in a two-speed Europe if Germany and France lead the euro countries into a tightly integrated currency club with deeply entrenched policy co-ordination.

A further concern for the likes of Ireland is that a club within a club emerges, with closer cooperation among prosperous ‘core' Eurozone countries and ‘peripheral' countries left out in the cold.

Crucial here is a European Commission plan to strengthen the operation of the Eurozone. Advocates say the commission's plan is the best way to avoid fragmentation.

However, the initiative goes against the grain of Nicolas Sarkozy's plan and the commission's insistence that treaty change is not required and that euro bonds provide grounds for stability is at odds with Angela Merkel. Most observers say she will get her way, eventually.

What's more, the commission's plan embraces a high degree of policy surveillance, which is likely to cause discomfort to many of Europe's governments.

It falls to European Council president Herman Van Rompuy to bring the leaders together. The phone lines into his office have been busy all week.

6 WHAT are members doing?

Italian Prime Minister Mario Monti presented a new budget on Monday and the Greek parliament voted on the country's 2012 budget on Monday.

Both initiatives are crucial as the countries have struggled to gain Europe's confidence.

Ireland is sticking to its austerity programme with four harsh budgets in a little over two years, combining tax hikes and deep cuts to social programmes.

Equally important are the budget plans of incoming Spanish Prime Minister Mariano Rajoy.

7 WHAT ABOUT THE ECB?

The European Central Bank's governing council meets in Frankfurt tonight, hours before political leaders gather for dinner in Brussels.

Its president, Mario Draghi, has opened the door to a new intervention but says the politicians must act first to introduce a ‘fiscal compact' to enforce the rules. Assuming a binding agreement is reached, the bank is expected to step up its response. It may do this by increasing its purchases of sovereign bonds on the open market or by providing loans to the International Monetary Fund to enable it to step up its involvement, or by doing both.

8 A TWO-TIER EURO?

One idea to save the single currency is to create, in effect, a hard core Euro currency used by German, France, Luxembourg, the Netherlands and Belgium — countries in relatively good economic stead, with the other members of the Eurozone adopting a ‘Euro lite'. Such a mechanism, while not impossible, would be impractical and would, in essence, spell the end for the grand euro experiment.

—with files from agencies, Gulf News archives and the BBC.