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Euro-Zone Crisis: Merkel and Sarkozy Plan 'True Economic Government'

Following a summit meeting in Paris, Angela Merkel and Nicolas Sarkozy have announced proposals to introduce a "true European economic government" as part of a long-term plan to battle the debt crisis. They also appear to have ruled out issuing euro bonds, at least for the time being.

French President Nicolas Sarkozy alongside German Chancellor Angela Merkel at press conference. in Paris on Tuesday: An 'absolute will to defend the euro' Zoom
AFP

French President Nicolas Sarkozy alongside German Chancellor Angela Merkel at press conference. in Paris on Tuesday: An 'absolute will to defend the euro'

Angela Merkel and Nicolas Sarkozy have revealed plans for a "true European economic government" -- while at the same time appearing to rule out introducing euro bonds in the near future. Euro bonds have been the subject of an intense debate in recent days as the debt crisis unsettled markets and opened up a new dimension in the problems plaguing the common currency.

Speaking at a press conference following Tuesday's special Franco-German summit in Paris, the German chancellor insisted euro bonds -- which would see the euro zone issue bonds as a whole, rather than each individual country -- were not part of the solution. Rather, the aim was to solve the debt crisis in a step-by-step fashion: "I do not believe that euro bonds would help in that regard," she said.

The French president, meanwhile, said euro bonds could be a possibility in the future: "Perhaps one could imagine such bonds at some point in the future at the end of a process of European integration. But not at the beginning" of it.

Otherwise, he warned, precisely those countries "who have the best ratings today" might be threatened.

In recent days, calls for euro bonds have grown louder in Europe. Critics, however, maintain that euro bonds would punish countries with solid budget policies by increasing interest rates, while reducing the pressure on debtor states, since the securities would offer the lower yields.

'Euro Is the Foundation of Our Prosperity'

The two leaders also pledged to integrate financial and economic policies to a greater extent in the face of Europe's debt crisis. They proposed a tax on financial transactions in all the euro-zone countries starting in summer 2012, and called for closer joint governance of economic policy. A plan for Germany and France to harmonize their corporation tax will be drawn up by next year, to take effect starting in 2014.

Merkel said the goal is to "strengthen the euro as our common currency. In order for it to succeed, we need a strong integration of finance and economic policies in the euro zone."

The chancellor added, "The euro is our future, it is the foundation of our prosperity. And it contributes to our peaceful coexistence." For the first time in the crisis, Merkel also described the euro rescue fund, the European Financial Stability Facility (EFSF), as a "European Monetary Fund," a proposal long championed by Sarkozy. She said that fund would also be provided with "analytical capacities."

The proposal for a debt ceiling in all euro-zone member states, the chancellor added, was "an ambitious undertaking," but it is important to create trust in the common currency, "because the euro is the foundation of our prosperity."

Following the talks in Paris, Sarkozy said he and the chancellor were also proposing for all 17 euro-zone countries to commit to balanced finances and cement that aim into their constitution by the summer of 2012.

A 'True European Economic Government'

There would also be attempts to improve cross-border economic governance in what Sarkozy described as a "true European economic government," to be led by Herman Van Rompuy, current president of the European Council, for a two-and-a-half-year term. Leaders of the euro-zone states would meet twice a year and perhaps more often to discuss harmonization of finance and economic policy.

"We want to express our absolute will to defend the euro and assume Germany and France's particular responsibilities in Europe and to have on all of these subjects a complete unity of views," Sarkozy told the news conference at his Elysee Palace offices, where he was flanked by Merkel. "Our determination to combat these phenomena is unbroken, untiring and comprehensive."

The two are under pressure to come up with plans to shore up the euro zone and restore financial market confidence after a year and a half of turmoil that has refused to die down despite bailouts of Greece, Ireland and Portugal and the creation of an anti-contagion fund.

Germany's Upswing Stalls, France Stagnates

Merkel said on Tuesday that the global economic crisis is still having an effect on the stability of the European community. Her words appeared to be backed up by statistics on Germany's economic upswing released on Tuesday indicating growth is close to stalling.

Between April and June, GDP in the country rose by just 0.1 percent compared to the previous quarter. This is also contributing to a slow-down of growth across the entire euro zone, which saw an increase over the last quarter of just 0.2 percent.

France is also experiencing zero growth. Prior to his meeting with Merkel, Sarkozy had spent the day considering austerity measures proposed by his ministers. The daily Le Parisien is reporting that Sarkozy and French Prime Minister Francois Fillon have discussed the possibility of savings measures totaling between €5 and €12 billion for the next year.

In her press conference, however, Merkel said she was not pessimistic about economic prospects. The chancellor said she believed there would be significant growth for the total year for both Germany and France.

--dsk with wires

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