Angela Merkel and Nicolas Sarkozy, the German and French leaders, will hold talks on Sunday in an effort to reconcile their differences over how to tackle the eurozone financial crisis and fund an expected recapitalisation of European banks.

The need to prevent contagion from the soaring costs of government debt in peripheral eurozone members, such as Greece and Italy, and the subsequent loss of confidence in European banks because of their bond holdings, will be centre of the agenda for the German chancellor and French president.

Their longer-term plans for a new layer of “economic governance” to co-ordinate the fiscal policies in the 17-member currency union are also facing resistance from smaller countries, fearful that they may lead to big country domination, and downgrading the role of the European Commission. In spite of protestations to the contrary, divisions have emerged between the two capitals on how to maximise the use and effectiveness of the eurozone’s emergency rescue fund – the €440bn European financial stability facility – and whether to use it to top up the capital resources of banks holding large amounts of downgraded eurozone government debt.