The eurozone crisis will dominate an EU summit on Monday, with an emphasis on growth and "smart" budget discipline.
Chancellor Merkel (left) wants the EU to nail down a binding eurozone budget pactThe EU has more than 23 million unemployed people and there are fears that wide-ranging budget cuts will harm enterprise and training.
Cuts need to be "smart" - well-targeted - to allow room for future growth, the European Commission says.
Most member states - and not the UK - are expected to sign up to a new budget treaty, or "fiscal compact".
The goal is much closer co-ordination of budget policy in the 17-nation eurozone.
Diplomatic wrangling continues over the influence of non-eurozone countries in the new institutional set-up.
The UK opted out, in a blaze of publicity last month, but did secure observer status in the discussions.
Poland is insisting that it and other countries preparing to join the euro should be fully involved in the eurozone negotiations.
Currently the draft treaty says signatories will hold summits at least twice a year. The attendance of non-euro countries is left to the discretion of the summit president, with the words "will invite when appropriate and at least once a year".
The Czech Republic may delay joining the treaty because of a split in its ruling coalition and the Republic of Ireland may decide it has to put it to a referendum.
While France may be content with a eurozone-only membership, Germany is keen to include countries like Denmark, Poland and Sweden, not yet in the euro.
Firewall bidGreece remains a big question mark hanging over this summit. Complex negotiations with private creditors have not yet produced a deal to prevent Greece defaulting.
The European Commission says it is confident a deal will be reached within days. But Greece could run out of money as early as mid-February.
Private investors are being asked to take a 50% "haircut" (loss) on their Greek bonds in a complex bond swap, with the aim of cutting Greece's debt to 120% of gross domestic product by 2020.
A deal is crucial for the EU and International Monetary Fund to grant a long-awaited 130bn-euro (£109bn; $172bn) second bailout for Greece.
The atmosphere remained tense at the weekend with a row over a leaked German proposal to put an EU budget commissioner with veto powers in charge of Greek taxes and spending.
Greece rejected the proposal outright, but its EU partners remain alarmed by its failure to meet tough fiscal targets.
The EU is trying to put in place a bigger, more resistant "firewall" to prevent contagion spreading from Greece.
The eurozone plans to launch a 500bn-euro permanent bailout fund - the European Stability Mechanism (ESM) - in July, a year earlier than first planned. It is expected to get the final go-ahead at the summit. The UK will not contribute to it.
The existing temporary fund - the European Financial Stability Facility (EFSF) - is reckoned to be worth about 300bn euros and it ends next year. Some experts say it should be combined with the ESM, rather than running in parallel.
Italy alone needs to refinance more than 300bn euros of debt this year and there are many voices urging the European Central Bank to boost the firewall to at least 1tn euros.
Recession clouds make it a gloomy start to this year's EU summits. But the European Commission says 82bn euros of EU money is available for countries to spend on projects to boost jobs and growth.
EU leaders will exchange views on how best to tackle youth unemployment and support small and medium-sized enterprises (SMEs), many of which complain of excessive administrative costs imposed by Brussels.
The summit is expected to approve the European Stability Mechanism
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