Europe Editor Tony Connelly explores the background to this week’s crucial summit of EU leaders and potential implications for Ireland .

The summit of EU leaders may be seen as a turning point in the fortunes of the euro. But whether a change in fortune is down to decisive action taken by member states, or to a natural trend in market psychology remains to be seen.

Either way, what is being billed as Brian Cowen's last EU summit as Taoiseach does represent a gateway to the kind of deep European economic integration that would have been unheard of even at the height of the debate over the Lisbon Treaty.

Much of the critical discussion is going to take place when Ireland is in the throes of a divisive election campaign, with the probability that a new Taoiseach will only have been in office a couple of weeks when major decisions on the future of the EU are taken.

‘From an Irish point of view the timing couldn’t be worse,’ a senior EU diplomat told RTE News.

Put simply, the first 10 years of the single currency, uniting 16 (now 17) member states, have proved to have been built on sand. Now the rule book, largely at the insistence of France and Germany, is being rewritten, with far-reaching implications for how the eurozone operates.

There is a plethora of ideas in the mix, and like a game of snakes and ladders, Ireland could gain and lose: we may get a reduction in the interest rates we pay for the bail out, but have to swallow some kind of pain, be it in the area of corporation tax rates or a constitutional debt brake to prevent reckless borrowing in the future.

How did we get to this point?

The Greek debt crisis exposed deep failings in the nature of the existing rules governing the eurozone and how they were applied.

The past 12 months saw a litany of crises and ad hoc bailouts as politicians struggled to keep up with the international markets which - after Lehman Brothers - had grown progressively sceptical about the value of sovereign bonds.

At the December summit EU leaders, smarting from Ireland's €85bn bail out and reeling from the fear of contagion spreading first to Portugal and on to Spain (the EU's fifth largest economy), agreed that a comprehensive solution was needed.

It would work on a number of levels, and some of the ideas have already been examined by a task force working for most of last year.

There would be tougher and more immediate sanctions against countries that persistently broke the rules on keeping deficit levels close to 3% of GDP.

Eurozone governments would have to present to the European Commission and fellow members their broad budgetary plans in the first six months of the year (known as the European Semester).

They would have to show how they were keeping their debt and deficit levels down if those levels breached pre-existing guidelines.

Economic imbalances would have to be ironed out. That means that peripheral economies like Greece and Portugal would have to improve their competitiveness so that they can approach the same league as Germany, with its exporting prowess.

On the other hand, Germany would have to stimulate domestic demand as part of its side of the bargain so that the goods of other EU countries were in demand.

Member states would be set more intrusive targets in the area of labour reform, in improving growth, education and innovation levels.

Incentives

Incentives to get youngsters to stay at school longer, to get better training, and for people to retire at an older age are also part of the discussions, as is the need to make pension systems sustainable.

Many of these ideas are politically sensitive and raise issues in terms of monitoring and implementation.

In the background France has always wanted more economic governance within the eurozone, whereby politicians have more of a role in policy and where the European Central Bank (ECB) has less independence.

Germany, on the other hand, always wanted greater fiscal responsibility. They are, after all, the biggest paymasters, and the ones who had to underwrite the bailouts when they happened.

In recent weeks there have been deeper contacts between Paris and Berlin on the scope and nature of ‘economic governance’. They're expected to present their ideas at the EU summit, although the move is seen more as a staging post in the run up to the Spring summit on 24-25 March.

The German Chancellor Angela Merkel has been criticised in the past year for appearing to respond too slowly to the unfolding crisis.

But senior EU officials acknowledge that she needs results if she is to sell the benefits of eurozone membership to sceptical German voters, who, incidentally, go to the polls seven times over the coming months in regional elections.

Among the ideas emanating from the Chancellery in Berlin are linking retirement age to a country's demographics, and requiring countries to adopt a German-style constitutional ‘debt brake’ to prevent eurozone capitals running up excessive debt.

Paris wants more regular summits of eurozone leaders to enhance their belief in economic governance, and President Nicholas Sarkozy has made no secret of his desire to harmonise corporation tax levels across the EU.

Interestingly, the Spanish prime minister, Jose Luis Zapatero has now added his voice, calling for a ‘harmonised eurozone tax structure’.

This puts both men on a collision course with Ireland, but also countries like Slovakia, Estonia and Malta. German opposition to Ireland's low corporate tax rate is thought to have cooled; in any event all decisions on taxation require unanimity, and Ireland still has the legal guarantees from the second Lisbon referendum that our tax policy remains a strictly sovereign decision.

Yet we are at a distinct disadvantage heading into the fray.

Credibility

Ireland's credibility has been bruised by the collapse of the economy and the EU IMF bail out. The body in Dublin politic has been transfixed by the shambolic collapse of the Fianna Fail/Green coalition, much to the concern of other EU capitals.

Brian Cowen arrives in Brussels as a lame duck, and when the big summit at the end of March takes place, the new Taoiseach - Enda Kenny, if the polls are to be believed - will only have been in the job a couple of weeks.

If a rumoured emergency summit on 7 March is indeed called, then Mr Cowen will have to go as a caretaker Taoiseach, since no new leader can be in place before March 9.

‘Brian Cowen's capacity to direct the discussion is severely limited,’ said one senior EU diplomat.

Meanwhile, the negotiations will continue. Germany will support the beefing up of the €440 billion rescue fund known as the EFSF in exchange for agreement on its concerns, noted above.

Within that process there may be scope for Ireland to have the interest rates on its loans reduced, but the reduction may be marginal. Other ideas, like the ability for Ireland to use the facility to buy its own bonds on the secondary market (and thus influence the market price), as well as the suggestion that Ireland and Greece could be given 30 years to pay back their debts, are still up for discussion.

There are some grounds for optimism, though. The atmosphere around this summit is less febrile than before, since recent bond auctions by Spain, Portugal and Italy, have received better-than-expected attention from investors.

And there are indications that the European Commission, and perhaps other big member states, are still willing to cast a forgiving eye over Ireland, because of the pain taxpayers have taken so far, and because export growth appears to be returning.

Tony Connelly