EU scrambles to fix grand euro bargain

European Union leaders scramble Thursday to find a last-minute deal to save the euro at a crucial summit for a debt-laden currency union threatened with break-up. With the entire 27-state EU placed under downgrade watch by international credit rating giant Standard & Poor's, the EU leaders are trying to navigate obstacles to treaty changes required to enforce adherence to national budgetary discipline targets. The biggest obstacles according to high-ranking officials and diplomats are Germany's refusal to embark on anything short of treaty change agreed under the full glare of lengthy, costly and risky public consultation, but that its government considers legally-secure. That and a British refusal to back changes Berlin wants all EU states to agree to, unless it secures important quid pro quos such as ring-fencing the all-important City of London financial services sector from future EU regulation including a proposed tax. The situation is veering from serious towards desperate, 24 hours from a self-imposed EU deadline to save the bloc from imploding -- so much so that US President Barack Obama held urgent telephone talks late Wednesday with German Chancellor Angela Merkel.  Already, Obama had despatched his treasury secretary Timothy Geithner to Europe for talks with key players that will continue on Thursday in Marseille, France, where EU conservative allies are meeting for pre-summit negotiating strategy talks. Merkel, along with French President Nicolas Sarkozy and European Central Bank chief Mario Draghi, plus three other senior eurozone figures, will stage their own negotiating huddle ahead of the Brussels summit starting at 7:30 pm (1830 GMT). They hope to conclude a grand bargain that can take intense pressure off those countries most at risk of needing bailed out -- Italy and Spain. As the EU begins two days of scheduled talks, the race is on to deliver cash and policy fixes. They must find what another high-ranking EU official called "something solid, safe, sound and stable" and a solution with enough "substance, speed and certainty" to impress investors. As bookmakers reported fast-shortening odds on the eurozone not surviving next year, a highly-placed figure speaking on condition of anonymity highlighted the fact that credit ratings for Italy and Spain are at the level of strife-torn Egypt. France and Germany have called for changes to the EU treaty to fix flaws in the design of a monetary union created in 1999 but which is struggling to evolve into fiscal, economic and full political union. But as Geithner demanded Europe construct "a sufficient strong firewall" to prevent the kind of collapse suffered by Greece spreading along the Mediterranean's northern shores, non-euro Britain sensed an opportunity. "The more that countries in the eurozone ask for, the more we will ask for in return," British Prime Minister David Cameron told lawmakers in London. Leaders will try to agree new rules for the 17 nations that currently share the euro, to get sovereign states to enact EU guidelines that say annual deficits should not be more than 3.0 percent of gross domestic product (GDP), and cumulative debts not more than 60 percent of GDP. Earlier attempts to tighten eurozone economic governance fell down in the absence of automatic penalties or where voting rules allow political friends to club together and evade punishment. At the same time, leaders must try to boost the firefighting capacity of the 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 existing bailouts, with officials warning of fatigue among investors. The new head of the ECB, Italy's Mario Draghi, wants to see a "fiscal compact," a contract between euro states short of a full union of tax and spending, before signalling any move towards operating as a US-style government lender of last resort. There is intense political pressure on the "independent" ECB to use its ability to create money to buy more bonds and so sharply lower eurozone borrowing costs.