The German and French leaders meet on Monday to discuss ways to boost growth in euro zone states struggling to overcome the sovereign debt crisis and rising unemployment, and finalise a deal to increase fiscal coordination within the currency union.
They may also discuss a financial transaction tax, the "Tobin tax", being promoted by France but resisted by Britain unless adopted on a global scale, which could split the European Union at a summit at the end of the month.
Chancellor Angela Merkel and President Nicolas Sarkozy, aiming to align the two powerhouse partners that have driven European integration, will also focus on how to boost employment in the current era of austerity.
While Germany's labour market is thriving, employment is a pressing issue for Sarkozy, who faces an election in less than four months and is trailing in polls while French jobless claims are at their highest level in 12 years.
He may also try to accelerate plans for a tax on financial transactions, which he has set out as a priority ahead of the election, and which on Friday he vowed to implement in France even if EU partners like Germany are not on board.
Paris and Berlin want a "Tobin tax" to be applied across the EU, but Britain is resisting, fearing it will damage London, a global financial centre and mainstay of the British economy where much of the tax would be raised.
On Sunday, British Prime Minister David Cameron said he would veto a European-wide financial transaction tax unless it was imposed globally, deepening the confrontation over the matter with both France and Germany.
German officials expect the EU summit to show satisfying results on stronger budgetary rules they have urged for countries using the euro.
The updated version of the EU's 'fiscal compact', which gives Brussels the right to take states to court if they violate the stricter rules, is nearing approval, relieving pressure on Merkel to take new initiatives at the summit.
"Reaching a functional agreement already by the next (EU) meeting on Thursday is not out of the question," Elmar Brok, a German member of the European parliament, told Reuters.
Hanging over the meeting will be Europe's sovereign debt crisis, and questions over what can be done in the near term to relieve pressure on states like Spain and Italy, which are due to pay back a mountain of maturing debt this year.
Both states face crucial bond auctions this week that will test investors' willingness to fund countries at a time when low growth, weak public finances and the threat of ratings downgrades risk driving borrowing costs to unsustainable levels.
Until now Germany has favoured a crisis-fighting proposal to boost funding for the International Monetary Fund so that it could open larger credit lines to troubled euro zone states if needed, in exchange for strict adjustments.
Italy, which requested IMF monitoring in November to calm market concerns over its reform measures, would prefer to avoid reliance on such a plan; its former economy minister has called IMF aid "the most serious risk for Italy."
Concern over Italy may have led the French and German leaders to strengthen ties with Prime Minister Mario Monti. He met Sarkozy in Paris last week, and will visit Merkel for talks on Wednesday.
The three meet again in Italy on Jan. 20, before a Jan 23 EU finance ministers meeting and the Jan 30 EU summit.
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