European Union leaders are using a Thursday summit to try to fix
deep, long-standing problems with their economy by forging tougher
rules to rein in government overspending - and prevent another debt

Though the summit's formal focus is on long-term
solutions, the 27 EU leaders also face more immediate worries about
potential losses hitting European banks and continuing speculation
about market pressure possibly pushing Spain to seek outside financial

Spain has said it will soon publish results of a review of
how much its banks could lose if the economy worsens and house prices
tumble further, in an effort to calm market worries that the government
may ultimately have to rescue local banks.

Diplomats say most
European governments - except Britain and the Czech Republic - are also
in favour of publishing banking “stress tests” for the first time, as
the U.S. did in 2009 to show how much capital the country's 19 biggest
banks needed to raise to cope with more losses.


“We see that the
markets are unsettled and that confidence between banks is tattered,”
German Finance Ministry spokesman Michael Offer told DAPD news agency.
“Transparency could be helpful as a stabilizing factor.”

He said
EU finance ministers would decide the details on how and when the tests
would be done by national bank supervisors. National banking
supervisors are currently testing how well big financial groups could
cope with worse economic situations and will discuss their results with
the European Commission, the European Central Bank and EU governments
at the end of June.

Marco Annunziata, an economist at UniCredit
bank, says Spain's move to publish bank tests could encourage other
countries to do the same, “allowing Europe to finally clear the air on
the health of its financial system.”

“Greater confidence in
Spain's financial system could in turn bolster market optimism on the
country's ability to repair its public finances,” he said in a research
note. “If Spain fails, the eurozone's wheels will come off, derailing
the continent's recovery and its financial system.”

EU nations
are trying to calm volatile markets worried about Europe's soaring
debts - both public and private. Greece needed a bailout from EU
governments and the International Monetary Fund to avoid an
embarrassing default in May.

A massive “shock and awe”
euro750-billion (US$1-trillion) financial rescue package for other
indebted countries has failed to halt the euro's slide in recent weeks
as markets eye wider problems across Europe: a banking system that may
not have fully owned up to losses from the 2008 crisis and the prospect
of slow economic growth for years ahead.

Spain's total debt,
both public and private, could top euro300 billion, economist Daniel
Gros estimates, and markets are treating the government as if it had
debt far above its fairly prudent level of 64.9 per cent of gross
domestic product this year.

The spread, or the difference in
interest rates between Spanish bonds and the benchmark German bund,
rose to a record high Wednesday as investors saw more risk that the
country could default.

Under pressure from markets and other EU
nations, the Spanish government has agreed to labour market reforms to
encourage companies to hire - and make it easier to fire - workers in
an effort to cut its jobless rate, the highest in the eurozone at
around 20 per cent.

The determination to make long-delayed
structural reforms, usually one condition of International Monetary
Fund loans, and a scheduled meeting between the Spanish prime minister
and IMF head Dominique Strauss-Kahn have fueled rumours that the
country could be seeking financial aid options. Such speculation is
strongly denied by the IMF and by Spain.

Separately, the
European Union's executive says it will propose new sanctions for
governments that break limits on debt and deficits as it toughens rules.

European Commission says it will lay out its reforms on June 30 and
make a detailed proposal in September for leaders to agree in October.

is suggesting that governments jointly review each others' spending
plans before they draft their final budgets, that the EU issue early
warnings when countries run up debt or become far less competitive than
their neighbours on key indicators such as wage levels.

Stricter oversight of national spending aims to prevent any more EU countries requiring financial rescue.

is firmly opposed to discussing its budget plans with other nations or
the European Commission before it draws up the final spending program.
Germany is calling for harsh sanctions, such as stripping countries of
voting rights if they break the budget rules.

Wider talks will
focus on ways to shake up the region's sluggish growth, setting 10-year
targets for Europe to become more competitive by investing more in
research, education and renewable energy.

Governments are also
due to broadly back a levy on banks - but were unclear how much this
should be and whether it should be paid into national coffers or a
special bailout fund. They will call for a similar global levy at talks
of the Group of 20 rich and emerging nations in Toronto next week.

Associated Press writer Robert Wielaard contributed to this story.

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