France joined Spain in calling for rapid publication of "stress tests" on European banks as EU leaders began a summit on Thursday to agree new budget rules and tried to allay concern about euro member Spain.
The euro got a boost and the premium investors demand to hold Spanish debt rather than benchmark German issues eased from record highs after Madrid succeeded in selling 3.5 billion euros in 10-year and 30-year bonds, dispelling the market's worst fears.
Despite a flurry of reports in recent days that Madrid may be forced to tap a 500 billion euro ($613.2 billion) EU safety net set up to prevent euro area contagion, leaders said Spain would not be on the agenda of the one-day meeting in Brussels.
"Spain may be in difficulty. But today we will not deal with this case specifically," Luxembourg Prime Minister Jean-Claude Juncker said in a newspaper interview.
To reassure investors, Spain, France and other euro members have announced a flurry of austerity measures and structural economic reforms in recent days, helping the euro recover from four-year lows against the dollar.
Speaking to Reuters Insider television in Paris, French Economy Minister Christine Lagarde said she strongly supported the publication of stress tests for French banks, whose balance sheets she said were sound.
"I know heads of states are likely to talk about it today and I for myself am strongly in support of that publication," Lagarde said, adding she had "no trepidation or anxiety" about the results for French banks.
"If someone suspects you have an illness, it's all very well to say 'No, no, no I'm very healthy,' but it's even better if you say 'OK fine, take my blood and make sure that I'm healthy'."
Spain said it would publish bank-by-bank stress tests soon and Lagarde said it would be ideal to do so by the end of July.
Germany, home to regional Landesbanken that were hit hard by the global financial crisis and have yet to fully recover, has been sceptical about publishing detailed stress test results, concerned it may be forced to recapitalise ailing institutions.
But its resistance appears to be softening. A senior German official signalled this week that Berlin was open to such a move and the finance ministry said it was coordinating bank disclosures at the EU level.
European Central Bank Governing Council member Erkki Liikanen said trust would return if the stress tests were made public and his French colleague Christian Noyer said they should be published by country and by bank.
SHOW OF UNITY
At their summit, EU leaders hope to overcome differences on how to strengthen budget discipline and economic policy coordination to convince financial markets they can prevent a repeat of the debt crisis which started in Greece and is now weighing on the entire currency zone.
German Chancellor Angela Merkel and French President Nicolas Sarkozy presented a united front after talks in Berlin on Monday, pledging unity to defend the euro from the worst crisis since its founding 11 years ago.
Sarkozy bowed to German demands for tougher budget rules and accepted that euro zone states which persistently breach deficit limits should have their voting rights in the bloc suspended, even if that requires treaty changes.
He also accepted that all 27 EU member states, as Merkel insisted, and not just the 16 that share the euro, should be involved in "economic government" to coordinate policies and he dropped French demands for dedicated euro zone secretariat.
The leaders were also expected to try to agree a common EU stance on a bank levy and financial transaction tax ahead of a G20 meeting on June 26-27.
The measures would force banks blamed for the crisis to pay towards cleaning up the cost of the crisis and to fight future meltdowns, but the EU may struggle to win over other countries, including G20 host Canada, at the summit later this month.
UNPOPULAR REFORMS
On Wednesday, Spain and France announced politically unpopular labour and pension reforms in the face of financial market pressure on euro zone states to clean up their finances.
Both are the sort of structural reforms recommended by the executive European Commission and by economists to adapt European economies to global competition and an ageing population, and to make public finances more sustainable.
But they face opposition from trade unions which see them as an assault on workers' rights and plan protest strikes.
Some analysts also worry that too much austerity could choke off a fragile economic recovery in Europe. Economic heavyweight Germany unveiled a four-year 80 billion euro savings plan last week, ignoring pleas from partners like France for fiscal steps that would boost domestic demand and help the euro zone recover.
"The German government believes it is leading by example in embarking on a severe round of budget cuts. But this is the last thing the euro zone needs at this point," said Simon Tilford of the Centre for European Reform in a research note this week.
