Merkel, Sarkozy propose eurozone government

By Juergen Baetz

Associated Press

Published: Tuesday, Aug. 16 2011 12:45 p.m. MDT

German Chancellor Angela Merkel, center, and President Christian Wulff, left, speak to spectators as they attend the commemoration of the 50th anniversary of the construction of the Berlin Wall in Berlin, Saturday, Aug. 13, 2011. Germany marks the 50th anniversary of the day communist East Germany sealed itself off behind the Wall. Germany had been divided into capitalist western and communist eastern sectors after the end of World War II. At the height of tensions between the United States and the Soviet Union, the East German regime started building the wall through the capital on Aug. 13, 1961.

Markus Schreiber, Photo

PARIS — France and Germany called on Tuesday for a "new economic government" for Europe, with mandatory balanced budgets enshrined in the constitutions of all euro zone members as a way to overcome the debt crisis that has threatened to fracture the continent's fragile common currency.

French President Nicolas Sarkozy and German Chancellor Angela Merkel's push for long-term political solutions instead of immediate financial measures like a single European bond sent the euro sliding.

Sarkozy and Merkel also proposed a Europe-wide tax on financial transactions and pledged to harmonize their countries' corporate taxes and in a move aimed at showing the eurozone's largest members are "marching in lockstep" to protect the euro.

Shares of financial markets operators, such as NYSE Euronext and the IntercontinentalExchange Inc., already under pressure as part of a broader sell-off of financial stocks, tumbled.

NYSE Euronext fell 10 percent, or $2.87, to $26.10, leading the S&P 500 Index in percentage losses. The IntercontinentalExchange was not far behind, falling 5.5 percent, or $6.33, to $110.10, the third biggest loser on the S&P.

Investors may be concerned about how the euro bloc will put in place what its leaders have suggested and how a proposed tax on financial transactions may affect demand for European assets, said David Gilmore of Foreign Exchange Analytics in Essex, Connecticut.

"On the surface, it sounds very bold, a federal 'eurozone,'" Gilmore said. "The practical part still seems, to me anyway, to be a pipe dream."

He said the plan to form a deeper fiscal union among the 17 countries using the euro "made the euro credible," but governments might not want to surrender their rights to set tax and budget policies.

But some analysts say only tighter fiscal convergence between the euro zone's 17 members, with the block's strongest members guaranteeing the debts of the weaker partners, will resolve a crisis that has dragged on for nearly two years and resulted in a string of sovereign bailouts worth hundreds of billions of euros.

Sarkozy and Merkel stressed their commitment to defending the common currency, a cornerstone of integration on this long-fractured continent. They presented their proposals after meeting Tuesday in Paris amid signs of economic slowdown, and after an exceptionally turbulent week on financial markets prompted by concern about Europe's financial health.

Sarkozy told reporters that he and Merkel want a "true European economic government" that would consist of the heads of state and government of all eurozone nations.

The new body would meet twice a year — and more in times of crisis — and be led initially by EU President Herman Van Rompuy for a 2½-year term. After that, Sarkozy suggested, it could be opened up to other heads of states and government.

The move appeared a step toward the closer long-term economic integration that many analysts have said is inevitable to make the euro experiment survive, though it was unclear how much effect it would have in the short term.

"There has to be a stronger coordination of financial and economic policy" to protect the euro, Merkel said.

Some were not impressed.

"Investors might be left wondering what was the point of this meeting," said Neil MacKinnon, economist at VTB Capital in London. MacKinnon said the measures outlined amounted to "well-intentioned rhetoric" but are not the "silver bullet" needed to settle Europe's debt and banking crisis once and for all.

The chancellor stressed that the crisis built up over several years by the actions of several member states, and there is no solution to tackle the crisis within days now.

"We will regain the lost confidence," she said. "That is why we go into a phase with a new quality of cooperation within the eurozone," she added, referring to the proposal of forming a permanent economic government for the eurozone.

Sarkozy and Merkel will send a letter outlining their proposals to Van Rompuy on Wednesday.

The leaders want the new budget rules to be enshrined in euro zone constitutions by summer of next year. They said the common French-German corporate tax would be established by 2013.

The two leaders ruled out, however, issuing common government debt in the form of eurobonds, at least for now, despite demand by many investors for such a bold but politically difficult move.

Sarkozy said that euro bonds could be considered "one day, but at the end of a process of European integration, not at the beginning."

The leaders also rejected calls for Europe's common bailout fund to be enlarged beyond the existing €440 billion ($633 billion), which Sarkozy said was "a considerable sum" and sufficient to overcome Europe's troubles.

In afternoon trading in New York Tuesday, the euro slid to $1.4385 as investors digested the proposal for greater coordination. It had spiked to $1.4472 immediately after French President Nicolas Sarkozy and German Chancellor Angela Merkel announced their plan.

Late Monday, it was worth $1.4451.

Associated Press writer Sarah DiLorenzo in Paris and David McHugh in Frankfurt contributed to this report.

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