At the start of three weeks likely to be crucial to the survival of the euro, the new French government and the European commission voiced strong backing for a new eurozone "banking union" to save the single currency.
The plan could see vast national debt and banking liabilities pooled – and then backed by the financial strength of Germany – in return for eurozone governments surrendering sovereignty over their budgets and fiscal policies to a central eurozone authority.
Spain's banking crisis, together with extreme volatility in Greece ahead of the rerun general election on 17 June and the French parliamentary poll on the same day, are compounding the febrile atmosphere and worrying the markets.
A "gang of four" – the European council president, the commission chief, the president of the European Central Bank and the head of the eurogroup of 17 finance ministers – has been charged with drafting the proposals for a deeper eurozone fiscal union, to be presented to an EU summit at the end of the month.
"You can't demand eurobonds but not be prepared for the next step in European integration," Germany's chancellor, Angela Merkel, said at the weekend. "We won't be able to create a successful currency like that and no one outside will lend us money any more."
Pierre Moscovici, the new French finance minister, said eurozone bailout funds should be used to inject cash into collapsing banks. Such direct payments are impossible under existing rules. Moscovici added that France wants the summit to set up a eurozone banking union, which would take on responsibility for propping up failing banks and guarantee depositors' savings across the 17 countries.
The commission and France are piling pressure on Germany to line up behind the proposal, which Merkel would need to take to her parliament for agreement. Renewed focus on Merkel came as she endured some of the strongest criticism yet seen during the 30-month crisis for the way she has handled the euro turbulence.
Joschka Fischer, the former German foreign minister, warned that his country was at risk of destroying itself and Europe for the third time in a century, and gave Merkel just a few months to change course and save the currency. In an article published on Monday, he wrote: "Germany destroyed itself – and the European order – twice in the 20th century. It would be both tragic and ironic if a restored Germany, by peaceful means and with the best of intentions, brought about the ruin of the European order a third time."
At a meeting in Berlin on Monday night, José Manuel Barroso, the European commission president, was expected to press Merkel on the issue of bank rescues, which has turned critical because of Spain's banking emergency.
Spain's prime minister, Mariano Rajoy, is reluctant to request a full-scale EU bailout because it would come with draconian and humiliating terms. He has the support of Olli Rehn, the European commissioner for monetary affairs. "It is important to consider this alternative of direct bank recapitalisation," said Rehn, "to break the link between the sovereigns and the banks."
Under existing rules for the bailout fund, money may go only to governments that can request a state rescue and then use the cash to shore up their distressed banks. The vast bulk of the Irish bailout has gone directly to the country's ailing banks.
On his debut visit to Brussels, Moscovici called for a change in those rules: "We are in favour of this banking union," he said. "It's a fundamental issue for which proposals are on the table."
Spain's most senior banker, Emilio Botin, boss of Santander, called on Europe's rescue funds to help out. He said four of Spain's banks needed €40bn (£32bn) of new capital "and that will be enough". Botin's figures reportedly include €19bn that the Spanish government has already pledged to pump into stricken lender Bankia – cash that Spain does not have.
Botin's assessment is at odds with banking analysts, who estimate that Spain's banks need up to €100bn. Santander, which operates a ringfenced banking business in the UK, is not among those judged to need fresh capital. However, it is likely that if new direct bank support were approved for Spain, Ireland and Portugal might request similar treatment.
In a speech in Italy at the weekend, the financier George Soros warned that Merkel had no more than three months to fix the euro, but outlined the prospect of a grim new eurozone controlled by Berlin.
"The likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany," he said. "Germany is likely to do what is necessary to preserve the euro – but nothing more.
"That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments … it would be a German empire with the periphery as the hinterland."
The proposals being drafted for the summit are certain to feature calls for a form of eurobond whereby Germany and other smaller creditor countries guarantee the debts of the struggling member states.
The blueprint, not yet finalised, has been played down by the European commission. "There is no masterplan," said a spokeswoman, Pia Ahrenkilde-Hansen. The notion was also rubbished in Berlin on Monday – but not ruled out. "We are talking about several years and certainly not a solution that we are thinking about in the current problematic situation," said Merkel's spokesman.
In return for yielding to the pressure to pay to save the euro, Berlin will insist on major steps towards a eurozone federation or political union with budgetary, fiscal, and scrutiny powers vested in Brussels and in the European Court of Justice, meaning vast transfers of sovereignty from member states.
The Portuguese government said three of its leading banks would receive capital injections of €5.8bn, using funds provided under the country's €78bn state bailout.
The banks included Portugal's largest, Millennium, as well as BPI and state-owned Caixa Geral de Depositos. Only one of the country's major banks, Banco Espirito Santo, is surviving without state funding.
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