FRANKFURT/BRUSSELS (Reuters) – The European Central Bank acted to soften a looming recession and avert a credit crunch by cutting interest rates and offering banks long-term funds on Thursday but spooked markets by dousing hopes of dramatic crisis-fighting action in the euro area.

ECB President Mario Draghi discouraged expectations that the bank would massively step up buying of government bonds if European Union leaders, gathering in Brussels for a crucial summit, agree on moves towards closer fiscal union.

He said the euro zone’s rescue fund should remain the main tool to fight bond market contagion, despite its clear limits, and said it was illegal for the ECB or national central banks to lend money to the IMF to buy euro zone bonds, appearing to veto one firefighting option under active consideration.

To counter that, Draghi announced unprecedented action to support Europe’s cash-starved banks with three-year liquidity and cut interest rates back to a record low 1.0 percent.

The euro and European shares dived as markets, increasingly convinced that only the ECB has the power to protect the euro zone, focused on what Draghi was cool about rather than the measures he announced.

“One step forward, two steps back,” said Alan Clarke, UK and euro zone economist at Scotia Capital. “The euro zone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping.”

The ECB cut its main rate by a quarter-point and flagged a strong chance of recession next year. Draghi admitted the central bankers had been divided even on that decision.

BRUSSELS, Dec 7 (Reuters) – European leaders are gearing up for a ‘battle royale’ over changes to the EU’s treaty at a summit starting on Thursday as they seek to forge deeper integration in the euro zone and turn the tide of the debt crisis.

Competing visions are on offer about how to modify the Lisbon treaty, with France and Germany taking one line and European Council President Herman Van Rompuy another. In between, several member states have concerns about both views.

The ability of the euro zone to plot a path to closer economic integration, and in the process persuade financial markets that the currency project can survive, depends on whether leaders can reach a meaningful consensus at the summit scheduled to end on Friday.

German Chancellor Angela Merkel and French President Nicolas Sarkozy agree that several changes to the EU treaty, which took eight years to negotiate, are needed to enforce stricter budget rules in euro zone states and prevent any future debt crisis.

“The current crisis has mercilessly uncovered the deficiencies in the construction of economic and monetary union,” they wrote in a joint letter to Van Rompuy issued on Wednesday. Van Rompuy will chair the two-day summit.

“We need more binding, and more ambitious rules and commitments for the euro area member states… We propose that those new rules and commitments should be enshrined in the European treaties.”

Van Rompuy does not disagree on the goal, but he differs on the best method of getting there.

BRUSSELS, Dec 7 (Reuters) – European leaders are lining up for a ‘battle royale’ over changes to the EU’s treaty at a summit starting on Thursday as they seek to forge deeper integration in the euro zone and turn the tide of the debt crisis.

Competing visions are on offer about how to modify the Lisbon treaty, with France and Germany taking one line and European Council President Herman Van Rompuy another. In between, several member states have concerns about both views.

The ability of the euro zone to plot a path to closer economic integration, and in the process persuade financial markets that the currency project can survive, depends on whether leaders reach a meaningful consensus at the summit scheduled to end on Friday.

German Chancellor Angela Merkel and French President Nicolas Sarkozy agree that several changes to the EU treaty, which took eight years to negotiate, are needed to enforce stricter budget rules in euro zone states and prevent any future debt crisis.

“The current crisis has mercilessly uncovered the deficiencies in the construction of economic and monetary union,” they wrote in a joint letter to Van Rompuy issued on Wednesday. Van Rompuy will chair the two-day summit.

“We need more binding, and more ambitious rules and commitments for the euro area member states… We propose that those new rules and commitments should be enshrined in the European treaties.”

Van Rompuy does not disagree on the goal, but he differs on the best method of getting there.

BRUSSELS (Reuters) – Proposals for fast-track changes to the EU treaty to shore up the euro zone may work for a few months, but a more fundamental overhaul is probably still necessary in the long run, the leading author of the EU’s treaties said on Wednesday.

They are, in essence, clever enough to win time for the embattled currency bloc, Jean-Claude Piris, who drafted all the EU’s major treaties of the past 20 years, told Reuters in an interview. But they are unlikely to convince everyone.

Herman Van Rompuy, the president of the European Council, presented a plan on Tuesday for narrow and rapid adjustments to the Lisbon treaty with the goal of forging deeper fiscal integration among the 17 euro zone countries.

The aim is to drive the currency union more quickly towards what he called a “new fiscal compact,” a phrase also used by European Central Bank President Mario Draghi and which may allow the ECB to step up its role in fighting the debt crisis.

Van Rompuy’s proposals will be discussed by EU leaders at a summit on Thursday and Friday, as the European Union takes another stab at trying to resolve two years of debt crisis turmoil that threatens to tear the currency union apart.

“I don’t think Herman Van Rompuy is naive. He’s very clever, and this is very clever,” said Piris, a French constitutional lawyer whose accomplishments include the Maastricht, Amsterdam, Nice and Lisbon agreements.

“The Van Rompuy paper will be a step, it will help to win time, two or three months, until March, maybe June. It depends on what the ECB does and if they intervene strongly,” he said.

BRUSSELS (Reuters) – Herman Achille Van Rompuy was no household name when he was appointed the first president of Europe two years ago. A former budget minister and central bank employee, he had served, reluctantly, as Belgian prime minister for barely a year. A provocateur once denounced him as having the “charisma of a damp rag.”

Two years on, Van Rompuy is still a conundrum to many. But as the continent gropes this week for a solution to its worst economic crisis since World War Two, the unassuming Belgian has been thrust into one of the most demanding diplomatic missions of recent decades. While many expected his office to be largely ceremonial, he has been charged with brokering a grand bargain among those who hold the bloc’s fate in their hands: the 27 countries of the European Union and in particular the 17 that share the single currency.

To his critics, Van Rompuy is a grey intellectual, lacking in the kind of take-charge dynamism the moment demands, a symbol of all that is wrong with Europe. To his admirers, he is reason to hope: a smart and thoughtful leader who grasps the gravity of the crisis and is perfectly placed to smooth egos and negotiate a solution.

Van Rompuy, 64, said he sees his role as “neither a spectator, nor a dictator, but a facilitator”. To some ears, that may sound like a parody of eurospeak. But in an institution whose very existence was built on compromise, his role is crucial. Van Rompuy faces what is probably his most challenging test this Thursday and Friday, December 8-9, when EU leaders gather for a summit on the sovereign debt crisis that in the past two years has consumed Greece, Ireland and Portugal, cast a shadow over far larger economies and now threatens the very survival of the currency union.

What emerges from interviews with Van Rompuy and more than a dozen other figures involved in resolving Europe’s problems is a portrait of a man determinedly trying to keep on top of a crisis whose severity and speed, he admits, took him and his fellow leaders by surprise.

Caught between personalities as forceful as German Chancellor Angela Merkel and France’s frenetic president, Nicolas Sarkozy, Van Rompuy has tallied a succession of diplomatic breakthroughs — many of which have been followed by dizzying setbacks. It has been a nerve-wracking two years — “so, so difficult,” he said at one point during an interview. Those difficult moments included what he says was the worst of all, in May 2010, when a do-or-die deal to prop up Greece nearly collapsed amid misunderstanding and mistrust between the French and German leaders.

Such moments underline how, to the extent Europe’s titular leader has power, it lies in his ability to cajole and convince. “You have to be very patient, because you have to respect everybody,” Van Rompuy said in the interview, in which he offered one of the most extensive and intimate accounts of his tenure in office to date. “Even if he knows he is the biggest player or the smallest player — they are all part of the game.”

BRUSSELS (Reuters) – Herman Achille Van Rompuy was no household name when he was appointed the first president of Europe two years ago. A former budget minister and central bank employee, he had served, reluctantly, as Belgian prime minister for barely a year. A provocateur once denounced him as having the “charisma of a damp rag.”

Two years on, Van Rompuy is still a conundrum to many. But as the continent gropes this week for a solution to its worst economic crisis since World War Two, the unassuming Belgian has been thrust into one of the most demanding diplomatic missions of recent decades. While many expected his office to be largely ceremonial, he has been charged with brokering a grand bargain among those who hold the bloc’s fate in their hands: the 27 countries of the European Union and in particular the 17 that share the single currency.

To his critics, Van Rompuy is a grey intellectual, lacking in the kind of take-charge dynamism the moment demands, a symbol of all that is wrong with Europe. To his admirers, he is reason to hope: a smart and thoughtful leader who grasps the gravity of the crisis and is perfectly placed to smooth egos and negotiate a solution.

Van Rompuy, 64, said he sees his role as “neither a spectator, nor a dictator, but a facilitator”. To some ears, that may sound like a parody of eurospeak. But in an institution whose very existence was built on compromise, his role is crucial. Van Rompuy faces what is probably his most challenging test this Thursday and Friday, December 8-9, when EU leaders gather for a summit on the sovereign debt crisis that in the past two years has consumed Greece, Ireland and Portugal, cast a shadow over far larger economies and now threatens the very survival of the currency union.

What emerges from interviews with Van Rompuy and more than a dozen other figures involved in resolving Europe’s problems is a portrait of a man determinedly trying to keep on top of a crisis whose severity and speed, he admits, took him and his fellow leaders by surprise.

Caught between personalities as forceful as German Chancellor Angela Merkel and France’s frenetic president, Nicolas Sarkozy, Van Rompuy has tallied a succession of diplomatic breakthroughs — many of which have been followed by dizzying setbacks. It has been a nerve-wracking two years — “so, so difficult,” he said at one point during an interview. Those difficult moments included what he says was the worst of all, in May 2010, when a do-or-die deal to prop up Greece nearly collapsed amid misunderstanding and mistrust between the French and German leaders.

Such moments underline how, to the extent Europe’s titular leader has power, it lies in his ability to cajole and convince. “You have to be very patient, because you have to respect everybody,” Van Rompuy said in the interview, in which he offered one of the most extensive and intimate accounts of his tenure in office to date. “Even if he knows he is the biggest player or the smallest player — they are all part of the game.”

BRUSSELS (Reuters) – Herman Achille Van Rompuy was no household name when he was appointed the first president of Europe two years ago. A former budget minister and central bank employee, he had served, reluctantly, as Belgian prime minister for barely a year. A provocateur once denounced him as having the “charisma of a damp rag.”

Two years on, Van Rompuy is still a conundrum to many. But as the continent gropes this week for a solution to its worst economic crisis since World War Two, the unassuming Belgian has been thrust into one of the most demanding diplomatic missions of recent decades. While many expected his office to be largely ceremonial, he has been charged with brokering a grand bargain among those who hold the bloc’s fate in their hands: the 27 countries of the European Union and in particular the 17 that share the single currency.

To his critics, Van Rompuy is a grey intellectual, lacking in the kind of take-charge dynamism the moment demands, a symbol of all that is wrong with Europe. To his admirers, he is reason to hope: a smart and thoughtful leader who grasps the gravity of the crisis and is perfectly placed to smooth egos and negotiate a solution.

Van Rompuy, 64, said he sees his role as “neither a spectator, nor a dictator, but a facilitator”. To some ears, that may sound like a parody of eurospeak. But in an institution whose very existence was built on compromise, his role is crucial. Van Rompuy faces what is probably his most challenging test this Thursday and Friday, December 8-9, when EU leaders gather for a summit on the sovereign debt crisis that in the past two years has consumed Greece, Ireland and Portugal, cast a shadow over far larger economies and now threatens the very survival of the currency union.

What emerges from interviews with Van Rompuy and more than a dozen other figures involved in resolving Europe’s problems is a portrait of a man determinedly trying to keep on top of a crisis whose severity and speed, he admits, took him and his fellow leaders by surprise.

Caught between personalities as forceful as German Chancellor Angela Merkel and France’s frenetic president, Nicolas Sarkozy, Van Rompuy has tallied a succession of diplomatic breakthroughs — many of which have been followed by dizzying setbacks. It has been a nerve-wracking two years — “so, so difficult,” he said at one point during an interview. Those difficult moments included what he says was the worst of all, in May 2010, when a do-or-die deal to prop up Greece nearly collapsed amid misunderstanding and mistrust between the French and German leaders.

Such moments underline how, to the extent Europe’s titular leader has power, it lies in his ability to cajole and convince. “You have to be very patient, because you have to respect everybody,” Van Rompuy said in the interview, in which he offered one of the most extensive and intimate accounts of his tenure in office to date. “Even if he knows he is the biggest player or the smallest player — they are all part of the game.”

BRUSSELS/BERLIN, Dec 6 (Reuters) – U.S. Treasury Secretary Timothy Geithner threw his weight on Tuesday behind a Franco-German plan to tackle the euro zone’s sovereign debt crisis and said the European Central Bank had to play a major role in any solution.

Geithner offered his support after Standard & Poor’s agency fired a second warning shot at the bloc in 24 hours by threatening to cut the credit rating of its rescue fund.

German Chancellor Angela Merkel and French President Nicolas Sarkozy want to change the EU treaty to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market trust and prevent the crisis spiralling out of control.

Geithner said he was encouraged by moves towards “fiscal union” – under which euro zone states would obey a common set of tight budget rules – and stressed the central role in tackling the crisis of the ECB, which has been reluctant to take decisive steps until governments get to grips with their budget problems.

Speaking after talks in Berlin with German Finance Minister Wolfgang Schaeuble, Geithner said euro zone countries needed reforms to lay the foundations for the economic growth which is essential if Europe is to solve its debt problems.

He also called for “reforms to create the architecture of fiscal union to make monetary union more viable for the long run”. Likewise, governments and central banks needed to offer financial support to protect the European financial system and allow states to borrow at sustainable interest rates.

“The ECB has been playing a central role in this crisis. It’s obviously going to continue to do that. Of course ultimately, these things only get solved by governments and central banks doing what’s necessary, but their rules are different,” Geithner said.

BRUSSELS/BERLIN, Dec 6 (Reuters) – Standard & Poor’s fired a second warning shot at the euro zone in 24 hours, threatening on Tuesday to cut the credit rating of its financial rescue fund as European leaders raced to find a political solution to their sovereign debt crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy want to change EU rules to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market trust and prevent the crisis spiralling out of control.

Visiting U.S. Treasury Secretary Timothy Geithner said after talks in Berlin he was encouraged by recent moves towards fiscal union in Europe and stressed the central role of the European Central Bank (ECB) in tackling the crisis.

Citing “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis”, S&P put the ratings of 15 countries, including Germany and France, on review late on Monday for a downgrade by 1-2 notches.

The U.S.-based agency went a step further on Tuesday, placing the top-notch rating of the euro zone’s 440 billion euro rescue fund, the European Financial Stability Facility (EFSF), on negative watch since it depends on the creditworthiness of the currency bloc’s six AAA-rated sovereigns.

European Council President Herman Van Rompuy, who will chair a crucial summit of the 27-nation European Union this week aimed at turning the corner on the crisis, proposed giving a bigger permanent euro zone rescue mechanism the status of a bank that would allow it to access ECB funding.

Germany has so far opposed any such move, which it says would breach a treaty ban on the ECB financing governments.

BRUSSELS/BERLIN (Reuters) – Standard & Poor’s fired a second warning shot at the euro zone in 24 hours, threatening on Tuesday to cut the credit rating of its financial rescue fund as European leaders raced to find a political solution to their sovereign debt crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy want to change EU rules to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market trust and prevent the crisis spiraling out of control.

Visiting U.S. Treasury Secretary Timothy Geithner said after talks in Berlin he was encouraged by recent moves towards fiscal union in Europe and stressed the central role of the European Central Bank (ECB) in tackling the crisis.

Citing “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis,” S&P put the ratings of 15 countries, including Germany and France, on review late on Monday for a downgrade by 1-2 notches.

The U.S.-based agency went a step further on Tuesday, placing the top-notch rating of the euro zone’s 440 billion euro rescue fund, the European Financial Stability Facility (EFSF), on negative watch since it depends on the creditworthiness of the currency bloc’s six AAA-rated sovereigns.

European Council President Herman Van Rompuy, who will chair a crucial summit of the 27-nation European Union this week aimed at turning the corner on the crisis, proposed giving a bigger permanent euro zone rescue mechanism the status of a bank that would allow it to access ECB funding.

Germany has so far opposed any such move, which it says would breach a treaty ban on the ECB financing governments.