US spying to trump economy at EU summit

Germany was pressing ahead with its demands for more scrutiny and "binding contracts" between governments and the EU commission ensuring "ownership of reforms" at national level in return for a vague promise of "solidarity mechanisms."

But then the news broke Wednesday night that Chancellor Angela Merkel's mobile phone may have been tapped by the US intelligence agency NSA.

Merkel at once phoned Barack Obama. The US president said that the agency is and will not be spying on her. But a White House spokesman could not confirm that the NSA has not done so in the past.

With France also having recently been irked by media reports that the NSA snooped massively on French citizens' phonecalls, leaders' attention is likely to be diverted to how to respond to this affair.

To date they have managed to keep relatively quiet about the revelations by former CIA contractor Edward Snowden about the extent of US surveillance abroad.

The European Parliament on Wednesday upped the pressure as well, asking leaders and the EU commission to halt a data agreement allowing the US to sweep through banking transfers on the lookout for terrorism funding.

Meanwhile, the fallout of the Lampedusa tragedy - where hundreds of African refugees died off the Italian coast - is also on the minds of leaders, with southern countries demanding more EU help.

Italian Prime Minister Enrico Letta has urged European leaders to bolster Frontex border agency and speed up the creation of Eurosur, a satellite-and-drone surveillance programme to detect migrant ships in trouble.

He told the Italian Parliament on Tuesday Italy "will not accept cut-price compromises" from the summit on the matter.

Malta's Prime Minister Joseph Muscat and his Spanish counterpart Mariano Rajoy also asked for the EU to share their burden, particularly as more refugees from Syria are expected to arrive in Europe.

But leaders are likely to defer any concrete decisions until after the May 2014 EU elections, according to the latest draft of council conclusions leaked to the Financial Times.

Compared to previous drafts, the latest version marks another victory for Germany, who got its way on setting a deadline - December - for beefing up the commission's powers on economic reforms in member states.

Berlin's main grouch with increasing "solidarity mechanisms" - the latest being a link between the eurozone bailout fund, backed up by taxpayers, and banks in need for more capital - is that reforms are abandoned as soon as the economy slightly improves.

"We have country-specific recommendations - but an evaluation by the European Central Bank shows that only ten percent of last year's recommendations were implemented. That's why we need to look at ways on how to improve the situation," a German official told journalists in Berlin on Wednesday.

In return, Germany seems to be budging on the so-called banking union.

Apart from the single supervision of 130 largest banks in the eurozone, Germany has so far been reluctant to back a new "single resolution mechanism" that would have the power to shut down failing banks and tell creditors, shareholders and ultimately taxpayers to foot the bill.

A proposal by the EU commission earlier this summer was flatly rejected by Berlin. The German government still has objections - particularly when it comes to national parliaments which are not mentioned in the proposal - but now eyes a deal by December.