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EU leaders meeting amid eurozone jitters

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Media captionDavid Cameron speaks to reporters as he arrives at the European summit in Brussels

Concerns about the stability of the eurozone are set to dominate a meeting of European leaders in Brussels.

The two-day summit is expected to see an agreement to set up a permanent system for rescuing countries that get heavily into debt.

But there is still much debate about how such a system should operate.

Meanwhile concern over Spain's financial stability continued as it was forced to pay a higher rate of interest in a government bond sale.

Spain has been under financial market scrutiny since the Irish Republic was forced to take an aid package of 85bn euros (£72bn; $113bn) last month.

That bail-out followed the 110bn-euro rescue of Greece in May.

Arriving at the summit, Sweden's Prime Minister Fredrik Reinfeldt stressed that beyond crisis management there was a long-term need for EU countries to reform labour markets and boost competitiveness.

Greece's Prime Minister George Papandreou said "the challenge is a collective one now - more integration... and all have to live up to their responsibilities".

'Haircut' for investors?

Issues on the agenda in Brussels include:

  • How to change the EU's Lisbon Treaty to allow for a permanent stability mechanism for eurozone members
  • Whether to increase the eurozone's 750bn-euro temporary bail-out fund, the European Financial Stability Facility (EFSF)
  • The possibility of creating pan-European bonds to boost confidence in the euro.

But even assuming that leaders do agree to the way countries are helped, the slow pace of politics in Brussels means a permanent stability arrangement will not come into force until 2013, says BBC Europe correspondent Matthew Price.

In the meantime they will have to rely on the current temporary mechanism that has already been used to rescue Greece and the Irish Republic, he added.

The European Central Bank (ECB) has been buying billions of euros of sovereign debt to ease the pressure on the countries seen as most vulnerable in the eurozone. It is to double the reserves it holds - to 10.8bn euros, from 5.8bn euros at present.

Analysts have expressed concern that the EU talks will not address a key issue - whether or not investors who have bought bonds in struggling euro nations will have to lose money, or in the language of the financial world, take a "haircut", on their investment between now and 2013.

This was causing "uncertainty" in financial markets, said Carsten Brzeski, a senior analyst at ING.

"This is an inconsistency. The politicians need to address this insolvency issue in the period between now and 2013," he told the BBC.

German caution

On Wednesday, German Chancellor Angela Merkel stressed Berlin's commitment to help its European partners, pledging that: "Nobody in Europe will be abandoned. Europe will succeed together."

But she has been an opponent of some suggested actions, including increasing the eurozone's euro bail-out fund or introducing euro bonds.

Mrs Merkel has also pushed for a change to the EU's Lisbon Treaty to make eurozone bail-outs legal - but only as a last resort.

The change is just a matter of "two sentences", which can be approved through a simplified procedure, European Parliament president Jerzy Buzek said.

EU leaders now have to agree on the wording - a delicate matter, as they are anxious to avoid any further wrangling or referendums on the treaty.

Spotlight on Spain

In its latest bond auction, Madrid managed to raise 2.4bn euros.

But the yield on the Spanish bonds - essentially the interest rate which the government must pay in order to borrow money - was higher than that on previous auctions of similar bonds.

The Spanish treasury sold 1.8bn euros worth of 10-year bonds at an average interest rate of 5.4% - up from 4.6% in the last such auction in November.

And it was forced to pay a rate of 6% to sell 618m euros in 15-year bonds, up from 4.5% in October.

The rising cost of borrowing reflects investors' concern about the outlook for the Spanish economy and its banking sector in particular.

Madrid insists it will not need to apply for a bail-out from the EFSF - the temporary rescue scheme funded by the EU and International Monetary Fund.

There was strong demand for Spanish bonds, but concerns remained about Madrid's ability to refinance its debts and support its banks, said Kathleen Brooks, research director at Forex.com.