The European Union began a nine-day battle over federal-style changes to save the Eurozone on Thursday with France presenting its policy on common budget control.
The European Central Bank cooled the air after shock action by central banks boosted markets, sending a strong message to EU leaders that it has no magic wand to shore up the Eurozone.
The new ECB president Mario Draghi told the European Parliament that the central bank will not act beyond rules laid down by EU treaties and that its current program of buying devalued government bonds is "temporary and limited."
The bank "should not be asked to do things that are not within the treaty", he told the European Parliament. "It would be not legal, but also a mistake because... it would undermine the credibility in the ECB," he added.
Germany strongly backs the ECB line, arguing that the first condition of a solution to the crisis is cast-iron federal-type corsets controlling national budgets and economic reforms to release growth.
Chancellor Angela Merkel is due to lay down her vision of how the EU should work, and her conditions, in a speech to the Bundestag lower house of parliament on Friday.
The surprise action by global central banks stoked speculation that Germany and France are about to roll out a new strategy for pooling sovereignty, possibly involving treaty changes.
But market tension remains high on uncertainty about whether EU leaders at a summit on December 9 will this time come up with a convincing big-bang solution to stop the crisis now threatening the EU itself and the global financial system.
The euro firmed but European stocks wobbled after a global surge in relief at the central bank action to ease distress in parts of the banking system.
The Bank of England said it had worked out an emergency plan in case the Eurozone broke up, and ratings agency Fitch said general risks across Europe had worsened, with increased pressures on bank balance sheets, and possible increased "stress on sectors with significant refinancing requirements."
Italy, at high risk of being the next and by far the biggest Eurozone domino to need a bailout after a bond issue went badly on Monday, said it is at risk of entering recession.
This warning came as the new Prime Minister Mario Monti is putting together his master plan to reform the budget after consultations with EU officials, for presentation to his cabinet on Monday.
Germany and France, which has toned down its pressure on the ECB to buy bonds, have warned that if Italy's finances become unsustainable the Eurozone will break up.
On the all important Eurozone bond market, where money has flowed back into German bonds after a shock setback last week, France raised money on easier terms but Spain had to pay increased rates although the overall outcome of its auction was judged satisfactory in the current climate.
French President Nicolas Sarkozy is to lay out later on Thursday how far France will go in pooling sovereignty, possibly with a change to treaties.
In London, analysts at Moneycorp commented that market reaction to the central banks' move had been "ecstatic" in the belief that it must be "a component of new and decisive action to quell the Euroland debt crisis."
But Moneycorp questioned this view, saying: "There is every chance that this latest breakthrough will turn out to be yet another nine-minute wonder."
Moneycorp said: "EU leaders have until their summit meeting next weekend to come up with something investors can believe in. Until then the euro is on parole."
Eurozone finance ministers are now looking to the International Monetary Fund to play a central role in providing bailout guarantees to the Eurozone, admitting that their own EFSF lifeboat fund will be too weak to do the job even with a boost agreed on Tuesday.
The catastrophic risks and importance of the EU summit deadline were highlighted by the EU's Euro Commissioner Olli Rehn. He declared that monetary union "will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration."
French Foreign Minister Alain Juppe also warned starkly on Wednesday that the breakdown of the Eurozone could cause an "explosion" of the European Union and bring back dark shadows of past conflicts.
Sarkozy, in his speech, will have to balance suspicion at home of being given orders by EU powerhouse Germany with suspicion on financial markets that EU leaders will again fail to come up with a big-bang solution to the crisis at the summit.
The central issue is whether and to what extent France and Germany, the two EU and Eurozone pillars, will lead partner countries towards a new architecture for the European Union and especially to pool sovereignty for federal-style control of budgets.
In Greece, workers were staging a new general strike against deep reforms tied to the latest rescue money, approved on Tuesday, which are also linked to a loss of about 50.0 percent for banks on their Greek bonds.
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