PARIS - Seeking to restore confidence in the euro, the leaders of France and Germany called for changes to the European Union treaty so that countries using the euro would face automatic penalties if budget deficits ran too high.
Stock prices rose and borrowing costs for European governments dropped sharply. Investors viewed the Franco-German proposal which will be debated at a European Union summit Friday as an important first step in an emerging plan to save the euro.
Implementing treaty changes could take months, but a commitment to tighter coordination could open the way for further emergency aid from the European Central Bank, the International Monetary Fund or some combination.
"Our wish is to go on a forced march toward re-establishing confidence in the eurozone," French President Nicolas Sarkozy said at a press conference alongside German Chancellor Angela Merkel. "We don't have time. We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders."
Investors have been hopeful that the pair will get what they want at a summit in Brussels on Friday, where failure could doom the euro.
Additional emergency funding from the ECB or elsewhere is necessary, economists said, to address the underlying problem of mountains of government debt in Europe, leaving markets still waiting for a permanent fix.
"The onus is still on the ECB to print money to make huge loans or bond purchases and draw a line under the crisis," said Jennifer McKeown, senior European economist at Capital Economics. "Perhaps if other member states sign up to Merkel and Sarkozy's proposals this week the (ECB) will step in."
Sarkozy pledged to have a new EU treaty ready for signing by March. It would then need to be ratified in each country, which could mean lengthy parliamentary debates or national referendums in some cases.
"A lot depends on the specifics and how these are going to be framed by lawyers," said Piotr Maciej Kaczynski, an expert on EU constitutional issues at the Center for European Policy Studies in Brussels.
At the very least, it could take at least 18 months to ratify a new treaty once it has been signed by all heads of state, said Kaczynski. "That is a much longer timeline than what markets might want," he said.
Countries like Italy and Spain need help now to lower their bond yields, an interest rate that reflects the cost of their borrowing and how creditworthy they are deemed to be by investors.
Sarkozy said he and Merkel would prefer that the treaty be agreed by all 27 members of the European Union. But he left the door open to one that covers only the 17 euro countries and anyone else "who wants to join us."
Sarkozy and Merkel discussed several specific proposals, some of which could be enshrined in a new treaty. They included:
automatic punishment for any government that allows its deficit to exceed 3 percent of GDP. Governments are supposed to follow this rule already, but many, including France, have flouted it;
requiring countries to enshrine in law a promise to balance their budgets;
never again asking private investors to take losses, as a bailout of Greece did;
making Europe's bailout fund permanent by the end of next year, rather than mid-2013;
and holding monthly European summits until the crisis is over.
Sarkozy said more details would be included in a letter sent Wednesday to European Council President Herman Van Rompuy.
After Sarkozy and Merkel spoke, stocks rose and borrowing rates for governments across Europe plunged, indicating a sharp rise in investor confidence in the continent's ability to resolve the crisis.
France's CAC-40 index climbed 1.2 percent, Germany's DAX rose 0.4 percent and markets outside of Europe also pushed higher, with the Dow Jones industrial average up 1.2 percent.
French banks, which have been hit hard this year over fears about their large exposure to the government bonds of financially weak countries like Greece, saw some of the biggest gains.
Societe Generale's stock price climbed 6.2 percent while BNP Paribas rose 4.9 percent. In Italy, shares of Unicredit rose 5.4 percent while Spain's Santander rose 3.6 percent.
Worries about the stability of the euro reached a fever pitch in recent weeks as Italy's bond yield, indicative of the rate it would pay to borrow on markets, jumped above 7 percent. That is the level that eventually forced Greece, Ireland and Portugal to require bailouts from the European Financial Stability Facility. By comparison, bond yields in Germany, Europe's largest and most stable economy, are roughly 2 percent.
Italian and Spanish bond yields fell sharply on Monday, an indication of growing investor confidence in their financial future. The yield on Italy's benchmark 10-year bond fell from 6.65 percent to 5.93 percent.
Italy, whose government debt is equivalent to 120 percent of the country's annual economic output, needs to refinance euro200 billion ($270 billion) of its euro1.9 trillion ($2.6 trillion) of outstanding debt by the end of April.
The size of the problems facing Italy and Spain are considered too large for the existing funds available to the European Financial Stability Facility ($590 billion) and the IMF ($389 billion.) To boost the firepower of the IMF, several economists have proposed that the ECB lend to it.
The big threat to the global financial system is that Europe's debt crisis could spiral out of control.
If governments default on their bonds, banks that own them could take a significant hit. It could become very difficult for these banks to borrow and nervous depositors could flee with their cash. In the worst case, a global financial panic could be triggered, in which banks all over are too skittish to lend to each other. That would cause a credit crunch that deprives businesses of the short-term financing they depend on for day-to-day operations.
With such fears in the air, the United States is ratcheting up its involvement.
Geithner will meet Tuesday in Germany with Draghi and German Finance Minister Wolfgang Schauble. On Wednesday, he travels to France for talks with Sarkozy and the prime minister-elect of Spain, Mariano Rajoy Brey.