This may be a ploy by Germany to goose the rest of the EU into supporting the changes to the constitution that Germany is seeking. Then again, at least one Berlin official believes that some of the rest of Europe doesn't understand the gravity of the situation.

Reuters:

President Nicolas Sarkozy and Chancellor Angela Merkel will lay out a plan to amend the EU treaty to anchor stricter budget discipline in the euro area, aiming to restore market trust and prevent the sovereign debt crisis spiraling out of control.

A French minister said the leaders of France and Germany would not leave Friday's European Union summit until a "powerful" deal is reached to arrest the crisis.

But while Paris voiced determination, a senior German official gave a deliberately downbeat assessment of prospects for an agreement in an apparent effort to jolt partners into accepting Berlin's terms and restrictions.

"I have to say today, on Wednesday, that I am more pessimistic than last week about reaching an overall deal ... A lot of protagonists still have not understood how serious the situation is," the official told a pre-summit briefing.

"My pessimism stems from the overall picture that I see at this point, in which institutions and member states will have to move on many points to make possible the new treaty rules that we are aiming for," he said, speaking on condition of anonymity.

The euro slipped, European share prices turned negative and safe-haven German bond futures rose after the official dented investors' hopes of a comprehensive solution.

It isn't just the "Merkozy" deal that is the problem. European banks are in dire straits - worse than many believed just a week ago:

Italian banks had to borrow 153.2 billion euros in emergency liquidity from the ECB in November, up from 111.3 billion euros at the end of October, Bank of Italy data showed, another big leap in reliance on the central bank which has almost quadrupled since June, when Italian lenders took 41.3 billion euros.

Euro zone banks took more than $50 billion in the ECB's first dollar funding operation since the world's leading central banks agreed last week to cut their cost, five times the $10 billion forecast in a Reuters poll of money market traders.

And Germany is set to reactivate a bank rescue fund created at the height of the 2008 financial crisis at next week's cabinet meeting, a government official said.

In short, the credit crunch hitting euro banks may make whatever the EU leaders do at Friday's meeting moot. The bank liquidity problem is connected to the debt crisis but is a separate issue as far as bailouts are concerned. This could mean that even changes to the EU treaty won't save the euro zone from collapse.