The leaders of the European Union’s two largest countries met in the German capital to discuss their next steps in combating the sovereign-debt crisis that has destabilized the Continent and threatened the common currency. Even as Mrs. Merkel and Mr. Sarkozy promised quick action to stem the crisis, investors signaled the depth of their ongoing concern over the instability that has spread from Greece to the very heart of the euro zone by purchasing German debt at a negative real interest rate for the first time ever.
Speaking at a news conference after the two leaders met at the chancellery building here, Mr. Sarkozy acknowledged the uncertainty in the markets, saying, “The situation is very tense, very tense.”
There are increasing signs that Greece will fail to make the structural changes to its economy that its leaders have promised. Greek’s prime minister, Lucas Papademos, warned last week that without deeper spending cuts a disorderly default was a possibility, and could result in Greece leaving the euro.
With an eye toward Athens, Mr. Sarkozy said that “our Greek friends must live up to their commitments.” Mrs. Merkel said that if those commitments were not met by the Greek government “it will not be possible to pay out the next tranche” of the bailout money.
The holidays may have created a lull in the action but the New Year promised to be just as hectic as the old for European leaders and Mrs. Merkel in particular. The head of the International Monetary Fund, Christine Lagarde, arrives on Tuesday evening for talks with the German chancellor. Italy’s prime minister, Mario Monti, comes to Berlin on Wednesday.
Mrs. Merkel and Mr. Sarkozy are scheduled to travel to Rome on January 20th for negotiations with the Italian government ahead of the next European Union summit in Brussels on January 30.
“Everyone would like a grand design rather than a series of small steps going forward, some going backwards,” said André Sapir, an economist and senior fellow at Bruegel, a research group based in Brussels. “Sometimes there doesn’t seem to be a design at all, and that has been unnerving investors being asked to refinance debt both private and public.”
A drumbeat of bad economic news lately has led many economists to predict the imminent return to recession for many of the countries that use the euro. At the same time, European countries and financial institutions need to raise roughly $2.4 trillion in 2012.
Asked whether she feared that ratings agencies would downgrade additional European countries and in the process further spook markets, Mrs. Merkel replied coolly, “Fear does not motivate my political actions.”
The gap between countries with sound finances and those like Italy and Spain that are forced to pay high rates has widened to a chasm of five percentage points or more. Germany on Monday joined the likes of the Netherlands and Switzerland as perceived safe havens where customers of short-term debt are willing to lose money in return for shelter from upheaval and the possibility of even greater losses.
Mrs. Merkel called the plan to stabilize the euro “an ambitious but attainable goal.” She hit several familiar themes, stressing that there were no quick solutions to the euro crisis and that Greece was an exception when it came to debt writedowns, often known as a “haircut,” for private investors. “Our intention is that no country must withdraw from the euro area,” Mrs. Merkel said.
She and Mr. Sarkozy both voiced their determination to press ahead with a tax on financial transactions opposed by Britain, but they appeared to diverge on the timing. Mr. Sarkozy, facing a strong left-wing challenge in his struggle for re-election in May, suggested France could go it alone and challenge other states to follow suit.
French Prime Minister François Fillon said today in Paris that France may present a bill on such a tax in February, hoping that other countries follow. “Someone has to be the first to jump in the water,” Mr. Fillon said.
Mrs. Merkel expressed her support for Mr. Sarkozy’s goal of pressing ahead with a financial-transaction tax, saying that European Union finance ministers should make a formal proposal by March. Although an agreement between the 27 members of the union was preferable, one among the 17 countries that issue the euro was acceptable.
“If Sarkozy loses the election, which is entirely possible, the Socialists would certainly be a more difficult partner for Merkel,” said Frank Decker, a political scientist at the Institute for Political Sciences and Sociology at the University of Bonn. “As a result, she looks for ways that she can strengthen his position.”
Steven Erlanger in Paris contributed reporting
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