There are fears that an economic crack-up in Europe could drag down the entire global economy. Europe is a substantial trading partner with the rest of the world. Any deep recession in Europe will be felt in the order books of other leading economies — including the U.S.
At a meeting of Eurozone finance ministers in Luxembourg on Thursday night, the head of the International Monetary Fund warned that the euro was under "acute stress" and urged leaders to consider measures — including jointly issuing debt — to alleviate the pressure on the region's debt-stricken members.
"We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," Christine Lagarde said at a meeting of finance ministers late Thursday.
Germany has strenuously opposed the issue of joint debt — or eurobonds — because, while it would immediately ease pressure on countries like Spain, German taxpayers would be put on the hook for foreign debts, and Germany's cost of borrowing would increase.
Asked in Luxembourg what Germany would think of her suggestions, Lagarde smiled and said "We hope wisdom will prevail."
Lagarde also Thursday said it was necessary to break "the negative feedback loop" that occurs when governments take on more debt to bail out their banks.
In Rome, Hollande said eurobonds need to remain a possibility "and not in 10 years," without specifying a timeframe. Rajoy spoke favorably about Monti's proposal to use bailout funds to buy bonds of vulnerable countries like Italy and Spain on secondary markets.
The leaders said they would spend the coming days lobbying their EU counterparts.
A growing number of international leaders have called on Merkel and the eurozone to find quickly a comprehensive solution to the debt crisis rather than continuing to take piecemeal measures that provide only temporary relief. At this week's G-20 summit of world economic powers in Los Cabos, Mexico, politicians, including U.S. President Barack Obama, called on Europe to do what was necessary.
Speaking at an economic forum in St. Petersburg, David Lipton, first deputy managing director at the International Monetary Fund, urged European leaders to act quickly: "The markets are beginning to question the viability of the European monetary union itself. It's very important that eurozone countries address the long-run question: Where is the architecture of the European monetary union going?"
"It's good that there is recognition that they have to move beyond austerity," said Luis Garicano, head of economics and strategy at the London School of Economics. "But the big decision is not the move beyond austerity, it is to set up the short-term and long-term architecture for the Euro to separate the sovereign risk and the financial risk."
The meeting was moved up by a few hours to give Merkel time to fly to Poland to watch Germany play Greece in a European Championship quarterfinal match. The game pits the teams of Europe's strongest economy, Germany, against the eurozone's most troubled, Greece. The just-installed Greek leader had no immediate plans to attend.
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Barry reported from Milan. Geir Moulson in Berlin, Nataliya Vasilyeva in St. Petersburg and Martin Crutsinger in Washington contributed to this report.
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