• Merkel and Sarkozy in Paris: European Council president Herman Van Rompuy to head up the twice yearly meetings of eurozone leaders and take a more co-ordinating role (Photo: elysee.fr)

Merkel and Sarkozy plan 'true economic government'

17.08.11 @ 09:28

  1. By Honor Mahony
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Under pressure to restore confidence in the eurozone, the leaders of France and Germany on Tuesday (16 August) outlined plans for further economic integration but shied away from financial measures seen by markets as necessary to stem the euro debt crisis.

Following the two-hour talks in Paris, President Nicolas Sarkozy and Chancellor Angela Merkel said they would work towards a common corporation tax by 2013 and to co-ordinate their annual national budgets.

More generally, they suggested eurozone leaders should meet twice a year and that all single currency countries should enact constitutional changes requiring balanced budgets.

"Germany and France feel absolutely determined to strengthen the euro as our common currency and further develop it," said Merkel after the discussions.

"The status quo is impossible," said Sarkozy, who noted that both Paris and Berlin want a "true European economic government."

The two leaders pledged to revive the idea of a financial transaction tax - a proposal that has been regularly mentioned in Brussels in recent months but has failed to get traction among member states.

"We are aware that this is a step-by-step process that cannot be agreed at once, but we are convinced it is right for Europe," Merkel said.

Enough?

The proposals were welcomed by EU commission president Jose Manuel Barroso as representing "an important political contribution by the leaders of the two largest euro area economies to this debate and the on-going work."

But others dismissed it as too little. "The Franco-German meeting has not produced anything particularly new or useful," said Sony Kapoor, managing director of Re-Define, an economic policy thinktank

The highly-anticipated meeting followed fresh turbulence in the markets last week, with Sarkozy coming under intense pressure amid speculation that France may be next in line to lose its AAA credit ranking.

The two measures that many analysts believe will help ease the eurozone's debt crisis – the issuance of eurobonds and increasing the size of the eurozone’s €440 billion rescue fund – were not on the table, however.

"Eurobonds can be imagined one day, but at the end of the European integration process, not at the beginning," said Sarkozy. He added that the fund's size is "sufficient".

"It is often said that eurobonds are a last resort for the eurozone but I don't think the eurozone is dependent on last resorts," said Merkel. "I don’t think eurobonds help us."

The leaders' reluctance to discuss eurobonds reflects deep hostility in Germany and other northern countries, such as the Netherlands and Finland, towards what they see as helping financially undisciplined countries without firm guarantees in return.

Merkel and Sarkozy's plans did not have an immediately positive effect on markets. Reuters reported that US stocks dropped more than one percent as details of the proposals emerged.

The meeting also took place amid more bad news about the eurozone, with second quarter results for Germany, released Tuesday, showing that GDP increased by only 0.1 percent.

Van Rompuy to be eurozone president

Details of the meeting are to be sent to European Council president Herman Van Rompuy today (17 September).

The former Belgian prime minister, who to date has had no formal role in the eurozone, is set to benefit politically from the crisis.

He is expected to head up the twice yearly meetings of eurozone leaders and take a more co-ordinating role.

This could also help reduce the number of disparate voices speaking out on eurozone issues. The depth of the crisis in 17-nation single currency has meant that every off-the-cuff remark by a leader has the potential to move markets.

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