Merkel, Sarkozy meet as euro economy stalls

By Greg Keller

Associated Press

Published: Tuesday, Aug. 16 2011 9:10 a.m. MDT

France's President Nicolas Sarkozy, right, speaks to German Chancellor Angela Merkel as he welcomes the German leader at the Elysee Palace, in Paris Tuesday Aug. 16, 2011.

Philippe Wojazer, Pool, Associated Press

PARIS — The leaders of Germany and France are meeting Tuesday to discuss Europe's debt crisis as new figures show their economies stalled even before the latest bout of turmoil struck financial markets.

The meeting between Angela Merkel and Nicolas Sarkozy in Paris comes after a week of huge turbulence in financial markets, largely blamed on Europe's sprawling government debts and worries that European leaders aren't doing enough to address them.

Economic growth in the 17 countries that use the euro sagged to a lackluster quarterly rate of 0.2 percent in the second quarter, as a previously robust expansion in Germany and France almost ground to a halt, according to figures from Eurostat, the EU's statistics office.

Europe's sagging growth prospects complicate the debt crisis, because slower growth makes it even harder for governments to shrink debt. Less growth in Germany and France — the two economic heavyweights of the eurozone — makes it harder for those countries to serve as creditors and back increased bailouts, while a slower economy also shrinks potential export markets for countries, like Greece, mired in recession.

"The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy," said Lloyd Barton, senior economic advisor to Ernst & Young. "A further deterioration in financial conditions could severely damage the outlook for the whole of the eurozone."

The downbeat growth news weighed on markets, and provided yet more evidence that the global economy is slowing down sharply, following disappointing second-quarter growth figures from the United States.

Financial markets have been hugely volatile of late, partly over fears that Italy and Spain, the eurozone's third and fourth largest economies, may find it too expensive to service their debts. Those concerns triggered last week's intervention in the bond markets from the ECB, which has increasingly stepped in as Europe scrambles.

France and Germany, which together account for almost half of the eurozone's economic output, are taking the lead in pushing for reforms. But, speculation that the two leaders would consider proposals for the eurozone to issue jointly guaranteed government debt appear to have been dashed, with officials for both sides indicating that would not be on the agenda.

Germany has remained firm in its stance that other EU countries must exert more fiscal discipline.

Though officials for both Merkel and Sarkozy have said eurobonds would not be on the agenda, analysts think Tuesday's meeting could set the stage for future political decisions about the euro and European integration.

"Markets have high hopes and few expectations," said Marc Ostwald, a strategist with Monument Securities. "They hope that there's something that will reassure and show decisive leadership."

That something, he suggested, could be a step toward creating a watchdog that would eventually oversee the implementation of eurobonds. The hallmark of the debt crisis has been soaring yields, or interest rates, on the bonds of struggling countries, as worried investors have demanded more and more to lend to them.

Higher yields, at a minimum, make it difficult for countries to climb out of a cycle of debt since they compound the amount owed. Sometimes yields soar so high that they effectively bar countries from borrowing in the markets, as has happened with Greece.

Some observers have suggested that eurobonds are a solution to the crisis since they would be backed by the eurozone as a whole and would thus paper over the disparities among countries in the monetary union.

Meanwhile, the chief of the International Monetary Fund urged rich-country governments not to squeeze their budgets so far that they stifle growth.

"For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans," Christine Lagarde wrote in the Financial Times. "At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects."

France was caught in the market crossfire last week, with investors worrying about the financial health of the country's banks in particular and whether it would be the next country after the U.S. to lose its triple-A credit rating.

McHugh reported from Frankfurt.

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