Merkel and Sarkozy meet as Berlin rejects eurobonds

The markets will be closely watching the crisis meeting having picked holes in each of the eurozone’s hastily agreed solutions to date.

But despite the intense scrutiny and pressure, it is unclear what major initiatives the two leaders can agree, with Merkel facing a parliament already rebellious about the second bailout for Greece agreed at a eurozone summit in late July.

Ahead of the meeting, German finance minister Wolfgang Schaeuble rejected the creation of Eurobonds, which would pool the debt of eurozone countries.

No eurobonds

“I rule out eurobonds for as long as member states conduct their own financial policies and we need different rates of interest in order that there are possible incentives and sanctions to enforce fiscal solidity,” he told Der Spiegel.

Berlin’s refusal to countenance this path comes as Giulio Tremonti, finance minister of Italy – another country under intense market pressure – described jointly issued bonds as a “master solution” for the eurozone debt crisis.

Proponents of eurobonds say they would lower the borrowing costs for struggling eurozone countries but others say they would also raise the cost for countries such as Germany, which has to date benefitted from being viewed as a safe bet by markets.

Both Sarkozy and Merkel are going into Tuesday's meeting with their own set of acute domestic problems.

The French president is facing elections next year and is desperate to be seen to be mastering the economic situation, with figures released last Friday showing zero economic growth in the second quarter.

The German chancellor meanwhile is conscious of the popular and political antipathy towards the steps already agreed by EU leaders in July to help troubled eurozone countries.

The measures to make the €440 billion eurozone rescue fund more flexible have to be ratified by national parliaments. Merkel has said she hopes German MPs will give the green light by the end of September. But the speaker of the German parliament, Norbert Lammert, a member of Merkel's Christian Democratic Party, indicated that this timetable may be too ambitious.

"The European recovery mechanism issue is so important that parliament cannot debate it with the necessary care and vote on it in the course of just a few days," Lammert told the Frankfurter Allgemeine Zeitung paper on Sunday.

"It will hardly be possible to deal with the matter between September 20 and 23," he said of the government’s plans.

There is also opposition among the Liberals who are part of the governing coalition.

“We will not hand out a blank cheque to buy other country's bonds," said Rainer Bruederle, leader of the liberals in the parliament.