BRUSSELS (AFP) - Europe clamped down on excessive state borrowing and laid foundations for cross-border economic government on Thursday, as leaders kept a fearful eye on gathering dark clouds over Spain. They used a European Union summit to widen their focus from public overspends and also target dangerously high private sector debt, a bigger problem with Spains banks than it ever was with bailed-out Greece. The decisions came as Madrid auctioned off a major tranche of its sovereign debt, with the interest it has to pay to raise funds rising again. Seperately Spain and Germany also decided to carry out stress tests on private banks public in a bid to soothe markets. Diplomats said agreement was reached to toughen sanctions for those who blow their budgets. But differences remained on how far to go in the creation of new penalties, intended for application after EU president Herman Van Rompuy produces a definitive report on economic governance in October. These will apply only to those countries that share the euro currency, sources said. Detailed discussions on whether, for example, the worst offenders could have EU voting rights withdrawn will take place on July 12, when Van Rompuys task force next meets. By the time specific changes come in, Estonia will also have become the 17th country to switch to the shared currency after the leaders assembled in Brussels gave their green light to entry on January 1. New British Conservative Prime Minister David Cameron had arrived for his first summit vowing to defend vigorously a series of red lines, with diplomats warning that penalties going beyond the 16-nation eurozone would require treaty change. He was not alone in resisting anything that might require painful and uncertain negotiations. We already have the solutions and the measures needed, said Swedish Prime Minister Fredrik Reinfeldt, pointing out that existing sanctions have never been used. Earlier this week France and Germany called for the EUs stability pact which sets notional limits on public deficits and debts, widely ignored since the worldwide recession to be reinforced. Ballooning debt levels in countries such as Greece, which recently required a multi-billion euro bailout from the EU and the IMF, have pushed leaders to think more of the effect of their decisions, and their public declarations, on their neighbours. Luxembourg Prime Minister Jean-Claude Juncker, who is also head of the Eurogroup of finance ministers, told the Luxembourg Wort daily that treaty change is not a possibility in the short or medium term. A British diplomat said that Camerons suspicion of the motives behind a joint Franco-German call for an EU bank levy, designed to offer an insurance policy against future taxpayer bailouts and to be presented at a G20 summit in Canada next weekend, meant London would push for reassurances it would only ever function as a patchwork of national levies. Berlin and Paris also wanted to see a tax on financial transactions proposed in Toronto, but that idea did not make it past first base with a senior EU official saying it is in the pipeline, but I wouldnt be able to answer where exactly it is in the pipeline. Put bluntly by one diplomat, London simply doesnt want it, for fear of banishing its lucrative finance industry to Switzerland or other non-EU offshore centres. Britains government is expected to unveil its own national bank levy in an emergency budget on June 22. A deal was cut allowing Brussels to vet the grand lines in member state budgets, in a bid to boost Europes competitiveness vis-a-vis major global rivals. Likewise, London and the Netherlands allowed leaders to recommend opening EU entry negotiations with Iceland despite anger in both countries over withheld compensation to savers with a collapsed Icelandic bank. Meanwhile, EU Finance Commissioner Michel Barnier said Thursday he would offer an economic recovery plan for the whole of the European Union in October. He told French television channel LCI he was working with the financial services at the request of (the head of the European Commission Jose Manuel) Barroso on a recovery plan for the internal market of the EU. In this big market of half a billion consumers with millions of small and medium businesses, if we act together, if we break down certain barriers, by making exchange among us easier and fairer... we could achieve growth of one or two percent on our own, he said. Thats what Im going to propose with what is called the Single Market Act from October. European Union leaders were in Brussels on Thursday for an EU summit focussed on tackling Europes financial and economic woes.