German-French talks on Monday launch a decisive week for reforms in Europe aimed at preventing a repeat of Greece's debt crisis, with the euro and stock markets adding to recent signs of improvement.
German Chancellor Angela Merkel and French President Nicolas Sarkozy were due to seek an accord between Europe's two biggest economies on new rules for the single currency area at postponed talks in Berlin, three days before a decisive EU summit.
German government officials also again quashed newspaper reports out of Germany that Spain was about to be the latest to apply for support from the EU in the crisis. Brussels had denied a similar report on Friday.
"The crisis has gone by and it's clear that we are accountable to each other. We've seen it lately with the Greek crisis and we must play by the rules, and the rules have to be changed," French Economy Minister Christine Lagarde said.
"The crisis has arisen and clearly modified the principles according to which the players are operating but I'm not suggesting that the crisis has gone, has disappeared, vanished," said told BBC radio.
EU finance ministers have drafted stricter rules designed to enforce the bloc's budget deficit limit of 3 percent of national output by applying earlier and tougher sanctions to countries in breach, and extending greater discipline to public debt. [ID:nLDE65A0O5]
On financial markets, the euro <EUR=> rose more than half a percent to above $1.22 on improved investor sentiment towards riskier assets. European stocks <.FTEU3> rose 1 percent to a four-week high amid optimism about the global economic recovery. [ID:nLDE65D0CC]
In one sign that recovery may be gathering pace, industrial production in the euro zone in April surged year-on-year more than in any month in almost two decades, data showed on Monday. [ID:nBRLEHE633]
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Top stories on euro zone debt crisis: [ID:nTOPNOW2]
Euro zone crisis in graphics: http://r.reuters.com/fyw72j
FACTBOX on planned euro zone reforms: [ID:nLDE65A0O5]
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Merkel and Sarkozy will also try to reconcile Franco-German differences on the notion of a European "economic government" to coordinate national economic policies within the 16-nation euro area and the wider 27-member EU.
France wants regular summits of euro zone leaders, backed by a dedicated secretariat, to harmonise economic, social and tax policies and rebalance the European economic between surplus and deficit countries. Germany wants closer governance among the 27 EU states, aimed chiefly at strengthening budget discipline and increasing economic competitiveness.
STRUCTURAL REFORMS
In the latest of a wave of structural reforms designed to adapt strained public finances to long-term challenges and make euro zone economies more competitive, France is set to announce an overhaul of its pension system and Spain a shake-up of its labour market, both on Wednesday.
European governments are taking advantage of the sense of urgency instilled by last month's $1 trillion financial backstop for the euro zone and, critics say, of voters' distraction by the soccer World Cup, to push through unpopular measures.
Elections in the last week have added political uncertainty in three euro zone states — the Netherlands, Slovakia and Belgium — which face protracted coalition negotiations after voters punished incumbents and boosted protest parties.
Inspectors from the European Commission, International Monetary Fund and European Central Bank are visiting Greece, the country that triggered the euro zone sovereign debt crisis, to check progress in reducing a massive budget deficit.
European Central Bank Governing Council member Patrick Honohan, trumpeting a concerted message from the ECB, said the market response to perceived euro zone fiscal risks had been overblown.
"This (nervousness) led to the situation a few weeks ago where you had effectively frozen money markets, interbank and the like, reflecting what seems to be an overblown response to perceived fiscal risks," the Irish Central Bank chief told a conference in Dublin.
"We've seen an extensive policy response to tackle this, not only quite sharp fiscal adjustment measures but in a huge commitment of public funds, the 750 million euro number," said Honohan. He referring to the European Financial Stability Facility, which would lend money to states that were shut off from credit markets.
Several euro zone states have announced austerity measures to curb public spending and cut budget deficits in recent weeks, with Germany and Italy joining Greece, Spain and Portugal, the three countries under fiercest market pressure because of their high deficits.
France has been more reluctant to make cuts, partly because Sarkozy faces a tough battle for re-election in 2012, but Prime Minister Francois Fillon said on Saturday that Paris would have to cut spending by 45 billion euros over the next three years, without detailing where the cuts would fall.
Seeking to reassure markets, EU officials have put the emphasis on fiscal discipline rather than measures to promote growth and combat 10 percent unemployment. [ID:LDE65D06P]
"Our priority is putting order into our public finances. We need fiscal consolidation and a new financial stability culture in Europe," European Commission President Jose Manuel Barroso said after meeting Merkel on Friday.
"There is new awareness in Europe that rules have not been respected and must now be respected. Circumventing the rules … is putting at risk our collective economic future. We need to move in the opposite direction. We need to strengthen our rules and the way the EU runs its economy."
