Rumours rife over Germany/France 'smaller EU talks'

France and Germany have had "intense consultations" on the idea in recent months, one senior official said.

The major players want to "establish exactly" who wants to be part of the club and what countries cannot remain within the union, the insider added.

French President Nicolas Sarkozy has already said a two-speed Europe, with the eurozone moving ahead more rapidly, was the only model for the future.

Senior officials have discussed the possibility of one or more countries leaving the eurozone while the remaining countries move towards deeper economic integration.

It would include closer links on tax and fiscal policy.

However, a French finance spokesman denied there were talks on reducing the currency bloc's membership.

"There have been no conversations between French and German authorities at any level on decreasing the size of the euro zone," the spokesman said.

European Commission President Jose Manuel Barroso warned about the economic costs of reducing the size of the currency union.

"There cannot be peace and prosperity in the North or in the West of Europe if there is no peace and prosperity in the South or in the East," he said.

At the G20 summit in Cannes last week, German Chancellor Angela Merkel and Mr Sarkozy indicated that Greece might have to drop out of the eurozone over the country's debt crisis.

But Mr Barroso issued a new call for the EU to "unite or face irrelevance".

He said the world was facing fundamental changes to the economic order and European countries had to stand together.

"The challenge is how to further deepen euro-area integration without creating divisions with those who are not yet in it. The world needs a stronger Europe: more Europe, not less," he said.

His comments came as Italy's borrowing costs rose to levels which triggered bailouts in Ireland and Portugal.

Mr Barroso said the EU was facing a "defining moment" and called on "responsible leaders" to make the case for Europe.

comurphy@herald.ie