File picture shows German Chancellor Angela Merkel (L) and French President Nicolas Sarkozy prior to a joint press conference on the eve of the G20 Summit November 2.
The leaders of France, Germany and Italy were to hold emergency talks on Thursday in the shadow of a failed German bond auction which took the debt crisis to the core of the eurozone.
France's President Nicolas Sarkozy is urging his German counterpart Angela Merkel to abandon her refusal to allow the European Central Bank to become a lender of last resort and so shield national budgets from sceptical markets.
Germany is also under strong pressure to agree to the creation of eurobonds, pooling benchmark German bonds with bonds issued by governments which have lost market confidence
"It is urgent," French Foreign Minister Alain Juppe said, ahead of the summit of the eurozone's top three economies. "The situation is serious. We must not underestimate its gravity. It touches even the most solid economies."
Italy's Prime Minister Mario Monti will also come under scrutiny in Strasbourg, with eurozone countries anxious to ensure he carries through promised reforms to shore up the Italian economy and halt the spread of the crisis.
French officials said the leaders would seek ways to "accelerate" reforms of eurozone financial governance, as the crisis threatens to spread to Spain and undermines confidence in even the French and German economies.
France is trying to retain its top AAA credit rating, which is also vital to the EU debt rescue fund called the EFSF.
"The ECB should play an essential role in re-establishing this confidence," Juppe argued, while admitting that France and Germany had not been "entirely in agreement" on this point -- a diplomatic understatement.
Merkel is firmly opposed to the idea of freeing the ECB up to monetise eurozone debt, fearing this would undermine its limited inflation-busting mandate, and observers say it would take a catastrophe to change her mind.
But Germany's position was highlighted dramatically on Wednesday by its failure to find buyers for more than two billion euros' worth of 10-year bonds, an almost unprecedented rebuff from the markets to Europe's strongest economy.
German bonds are the gold standard of eurozone debt but Berlin managed to draw bids of only 3.9 billion euros for a six-billion-euro auction, indicating investors are now sceptical about even the safest European assets.
"This auction follows a last Monday's weak Dutch three-year auction and it shows how fast the contagion is spreading from periphery to the eurozone core area," said analyst Alessandro Giansanti of ING Debt Strategy.
"Moreover, investors are expecting a sort of fiscal and political union with a jointly guaranteed issuance in the future of the Euro area," he said.
Against such a backdrop, Sarkozy will seek to persuade his partner to bring out what observers have started calling the "big bazooka" by turning the ECB into a last resort lender like the US Fed or the Bank of England.
For the moment, he seems to have little chance of success.
"The economic and monetary union is based on a central bank which has as its sole responsibility the maintaining of price stability," Merkel said on Wednesday, to loud applause from the German parliament.
"That is its mandate, it is carrying it out ... and I am firmly of the opinion that this mandate should not, absolutely not, be changed," she said.
Analysts told AFP that only a sharply deeper crisis -- such as a situation in which Spain and Italy could no longer refinance their debt through private bond markets -- could conceivably change Berlin's mind.
"Unfortunately, we are in the paradoxical situation where we are pinning all our hopes on a new catastrophe for Berlin finally to move," said Christian Schulz, an economist at Berenberg Bank.
Sensing an opening for deeper European integration, the European Union has begun to push for sweeping new powers to override national budgets and issue joint eurozone bonds to pool member state debts and share risk.
Again, Germany is cool on this proposal.
Meanwhile, a Washington-based banking lobby the Institute of International Finance, warned that -- according to its calculations -- the eurozone economy has already sunk back into recession.
"The economy has tipped into what we believe to be a recession, which will only serve to widen budget deficits and weaken bank asset quality," it said.
Nevertheless, Europe's main stock markets rose at the start of trading on Thursday, amid hopes that the Strasbourg meeting would bear fruit.