High stakes at make-or-break EU summit

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Treaty change, sanctions against countries that spend beyond agreed limits, eurobonds or the ECB as last resort: here are the main issues confronting European Union leaders and negotiators at a crucial summit which begins on Thursday evening.

EUROZONE GOVERNANCE
Applying stricter rules is the most important objective. It boils down to making countries stick to existing EU rules that say annual deficits should not be more than 3.0 percent of gross domestic product (GDP), and cumulative debts not more than 60 per cent of GDP.

This time, the idea is to carve these rules in stone -- changing the EU's treaty if necessary.

This is to send a message to markets that the years of overspending that lie behind the debt crisis are finished.

The threat of widespread debt downgrades, making government borrowing costs harder to manage, has made the problem urgent.

Earlier attempts to tighten eurozone economic governance even during the nearly two-year crisis have fallen down in the absence of automatic penalties or through voting rules that allow political friends to club together and evade punishment.

Now sanctions are to become automatic and immediate, and governments could also be invited to introduce a so-called 'golden rule' into national legislation obliging them to aim for balanced budgets.

The European Court of Justice (ECJ) in Luxembourg would have an enhanced role verifying that states meet this obligation, as well as adjudicating legal disputes.

The European Commission would be able to influence the drafting of national budgets from an early stage.

FIREWALL
The 17-nation eurozone has struggled to boost the firefighting capacity of its bailout fund, the European Financial Stability Facility (EFSF).

Launched with 440 billion euros ($590 billion), its lending capacity is down to 250 billion euros after bailouts of Greece, Ireland and Portugal.

It is way too small to help either Italy or Spain, and so the eurozone is looking to double its size to a trillion euros.

The EFSF is meant to be replaced by a permanent fund, the European Stability Mechanism (ESM), next year. The ESM would have 500 billion euros in guarantees provided by eurozone states.

Merging these to increase resources even during an overlap period, though, would require support from Germany, which cannot go above strict limits on the size of the guarantees it offers weaker eurozone partners without express parliamentary backing.

A report drawn up by EU president Herman Van Rompuy report looking at how to stabilise the eurozone also suggests that the ESM could be morphed into a credit institution, or bank, meaning that it could potentially obtain loans from the European Central Bank (ECB).

THE ROLE OF THE ECB
The new head of the ECB, Mario Draghi, wants to see a new 'fiscal compact,' an agreement short of a full union of tax and spending, which remains politically unpalatable to many, but one nevertheless that points ultimately towards that goal.

Many countries willing to sign up to moves that transfer more sovereignty to EU institutions want to see the ECB use its virtually unlimited firepower to buy the bonds their governments issue, because this has the effect of sharply lowering borrowing costs.

This is a decision that political leaders agree must be made "independently" by the central bank.

TREATY CHANGE
The changing of the EU treaty is a complicated business. Some aspects, diplomats say, can be amended simply through agreement by heads of state and government at the summit -- such as the introduction of the golden rule.

Others, for example like changing voting rules to make it tougher to evade fines, would require a process still requiring ratification, but not lengthy, costly and risky full public consultation.

The battle here is about how secure the EU would be if not all 27 sign on to changes -- and how quickly rifts would emerge that could threaten the coherence of the EU as a whole.

The changes could be implemented at the level of the 17 eurozone states, or also bring on board countries countries committed to switching to the euro currency, as well as Britain and Denmark, which have an opt-out to switch to the single currency.

Theoretically, they could be implemented by as few as nine under a provision for 'enhanced cooperation' written into the EU's most recent Lisbon treaty.

A diplomat said these different approaches could each be used in different instances where changes were deemed necessary.

EUROBONDS
Van Rompuy sees as a 'long-term perspective' the possibility of 'common debt issuance,' to be known as stability bonds across eurozone borders.

Ideas put forward range from the pooling of debts above the 60-percent threshold, to be redeemed over 25 years like a mortgage, to governments raising money backed by 'joint and several' guarantees committing their eurozone partners to repaying their debts if one day they cannot.

Germany remains opposed to this pooling of debt for the moment.