Europe's leaders edged toward a controversial new blueprint for a federalized eurozone as Group of Seven finance ministers were to discuss the growing crisis.
French Finance Minister Pierre Moscovici and Olli Rehn, the European commissioner for economic and monetary affairs and the euro, voiced strong backing for a new eurozone "banking union" to save the single currency.
They said $626 billion European Stability Mechanism, due to be launched next month, should be changed so it can inject money directly into troubled banks in Spain and elsewhere. This would help rescue Spain's banking industry without requiring the government of Prime Minister Mariano Rajoy to comply with draconian budgetary cuts of a Greek-style bailout, which Rajoy says Spain wants to avoid.
Bailing out banks directly from the new fund -- which is to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism that bailed out Greece, Ireland and Portugal -- is not what the fund was intended to do, Rehn said.
"But we see that it is important to consider this alternative of direct bank recapitalization as we are now moving on in the discussion of the possible ways and means to create a banking union," he told reporters in Brussels, adding it was important "to break the link between the sovereigns and the banks."
Moscovici said France would call for the ECM rule change when European Union heads of state and government hold a formal summit June 28-29.
"We are in favor of this banking union," Moscovici said in Brussels. "It's a fundamental issue for which proposals are on the table."
Germany has opposed the idea, with German officials insisting bailout money must flow through governments, with strict conditions, but German Chancellor Angela Merkel said Monday evening Germany may soften its position a bit, The New York Times reported.
"The world wants to know how we expect the political union to complement the currency union," she told a news conference in Berlin. "We have to find an answer in the foreseeable future."
Under existing bailout-fund rules, money may go only to governments that request a state rescue -- the governments then use the cash to shore up their distressed banks.
Banking analysts estimate Spain might need a bailout of more than $125 billion to shore up four of its failing banks, although the head of the eurozone's largest bank said the banks would need less than half that amount.
Emilio Botin, executive chairman of Spain's Banco Santander SA, said about $50 billion "will be enough" for the four banks, the British newspaper The Guardian reported.
U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke were to join other G7 finance ministers and central bank chiefs for a conference call about the euro crisis Tuesday.
Canadian Finance Minister Jim Flaherty, who announced the meeting, told reporters in Toronto Canada was very concerned about Europe's financial deterioration and would inject economic-stimulus money into Canada's economy if necessary to help Canada weather what many economists fear is a looming global recession.
Besides the United States and Canada, the G7 countries are Britain, France, Germany, Italy and Japan.