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France's President Nicolas Sarkozy welcomes German Chancellor Angela Merkel as she arrives for a meeting at the Elysee Palace in Paris, August 16, 2011. (PHILIPPE WOJAZER/REUTERS)
France's President Nicolas Sarkozy welcomes German Chancellor Angela Merkel as she arrives for a meeting at the Elysee Palace in Paris, August 16, 2011. (PHILIPPE WOJAZER/REUTERS)

France and Germany's proposals to shore up the euro fall flat Add to ...

The leaders of Germany and France called for bold action to preserve the euro zone, proposing steps for the 17-member group that would require harmonized taxes, mandatory balanced budgets and a new governing economic body.

Confronting dismal economic data of their own, the two heads of state economies took unique strides to reaffirm their commitment to the other 15 countries and the currency that binds them.

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German Chancellor Angela Merkel said only stronger European integration will regain the trust of global financial markets and save the euro. “The euro is our future, the basis of our well-being,” she told reporters emerging from a closed-door dinner meeting at the Élysée Palace in Paris, French President Nicolas Sarkozy’s official residence. “What we are proposing here is the means with which we can solve the crisis right now and win back trust, step by step.”

“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,” Mr. Sarkozy said.

The leaders met amid a spiralling European debt crisis, with investors craving a quick fix to prevent the spread of unaffordable interest rates that have driven Greece, Ireland and Portugal to seek bailouts from the euro-zone countries and the International Monetary Fund.

Compounding the debt crisis is the euro zone’s economy, which grew at a paltry rate of 0.2 per cent in the second quarter, according to figures released Tuesday. The twin engines of the continent’s economy also show signs of sputtering. Germany is now flirting with a dangerous slide back into recession; showing clear signs of stress from the debt crisis, its economy has stalled at 0.1 per cent growth – its worst performance in more than a year. France has also stagnated.

In the hope of bolstering competitiveness and economic growth, the two leaders have called on the euro-zone countries to legislate balanced budgets by mid-2012. Similar legislation has proved tricky for many U.S. states. And it could run into stiff resistance in many European countries that run large deficits.

Mr. Sarkozy also called for “a true economic government for the euro zone” that would consist of the 17 heads of state who use its currency. The group would convene at least twice a year and would be led by a president who would serve for a two-and-a-half-year term.

The ideas generated little consolation in the markets. The euro lost more ground, and North American stocks fell sharply after the meeting. The swift and negative reaction is a reflection of the apparently large gap between what investors want and what voters in Europe’s two wealthiest countries are willing to pay for.

Ms. Merkel cautioned that there is no “Big Bang” or “miracle solutions” to Europe’s woes. While investors craved a quick fix to the debt crisis, the two heads of state rejected calls for common euro-zone bonds or an expanded bailout fund.

Germany, in particular, worries that introducing euro bonds would mean sharply higher interest rates as the fiscally conservative country backstops the rest of Europe. The bonds are disdainfully equated with a “transfer union,” in which Germany underwrites the debts of its neighbours.

Ms. Merkel and Mr. Sarkozy are both facing the wrath of voters at home, who don’t understand why they’re constantly being asked to bail out their less frugal European neighbours – first in Greece, Portugal and Ireland, and perhaps eventually in Italy and Spain too. Many resent their tax dollars going to rescue what they consider greedy banks that hold mountains of now-risky European government bonds.

And yet without much bolder efforts to shore up Europe’s financial defences, economists worry the euro zone could splinter apart. And that would come at an even steeper price – for both the have and have-not members of its union.

Ms. Merkel and Mr. Sarkozy aren’t yet willing to do more because the people of Germany and France don’t yet see Greece’s bankruptcy as their problem, explained Benjamin Reitzes, an economist and foreign exchange strategist at BMO Capital Markets in Toronto.

“We haven’t got to the point where people in Germany and France make the link to the survival of the euro zone,” Mr. Reitzes said. “The collapse of the euro would be costly for every country involved. The transition costs would be huge.”

And that means more rocky days ahead in financial markets, Mr. Reitzes said.

The renewed call for a tax on financial transactions resurrects a pet project that Mr. Sarkozy failed to get the Group of 20 to endorse last year. Critics say a tax would push banks and other financial institutions out of the euro zone and produce little new revenue. That’s essentially what happened when Sweden imposed a similar tax in the mid-1980s.







Economists warn the second half of the year doesn’t look much better for most of Europe, which creates an economic double-whammy. No growth means European countries will have less tax revenue than expected to shore up weakened banks and balance their budgets.

And European leaders still face the threat of a new round of costly rescues of weaker member countries, such as Spain, as financial contagion spreads.

Follow on Twitter: @barriemckenna

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