March 28, 2024

Sarkozy and Merkel Call for More Fiscal Unity in Europe

Amid a backdrop of official figures showing that economic growth in the heart of Europe is slowing and investors growing wary of a deepening debt crisis across the region, the two announced a series of proposals that they said were aimed at defending economic growth and strengthening the competitiveness of euro zone countries.

Ms. Merkel and Mr. Sarkozy vowed to set an example for other euro zone members by harmonizing their national policies on corporate income taxes and to establish a common tax on financial transactions by 2013. In addition, they said, French and German finance ministry officials would meet quarterly to share economic forecasts and coordinate 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,” Mr. Sarkozy said at a news conference alongside Mrs. Merkel at the Élysée Palace following two hours of closed-door meetings.

The proposals came as the leaders of the euro zone’s two largest economies faced mounting pressure to forge a joint approach to a widening economic crisis that has already engulfed Ireland, Greece and Portugal and threatens to pull in Spain and Italy as well.

In the United States, where stocks were still trading, the Standard Poor’s index of 500-stocks and other major indexes fell steeply as the two leaders held a news conference announcing the results of their meeting.

In what may likely be the most ambitious proposal, Mr. Sarkozy and Mrs. Merkel outlined a plan for each of the euro zone governments to enact legislation that would constitutionally bind their governments to balancing their budgets. This “golden rule” would be expected to be enshrined in the constitutions of all euro members by the middle of next year, the leaders said.

France and Germany also proposed the creation of what Mr. Sarkozy called “a true economic government for the euro zone” that would be made up of heads of state of all of the 17 nations that share the European currency. This council, he said, would meet at least twice a year and would be led by a president who would serve for a term of two and a half years. He said he and Mrs. Merkel would jointly propose that Herman van Rompuy, a Belgian and the current president of the European Union, be the first to take on this role.

“Germany and France feel absolutely obliged to strengthen the euro as our common currency and further develop it,” Mrs. Merkel said. “It is entirely clear that for this to happen, we need a stronger interplay of financial and economic policy in the euro zone.”

The summit meeting came as European stock markets were in retreat Tuesday for the first time in four days and the euro slid against the dollar following fresh economic data that showed growth in the euro area fell more than expected in the three months through June as growth in Germany came almost to a standstill.

Gross domestic product in the 17-nation euro area rose 0.2 percent in the second quarter of 2011 compared with the previous quarter, according to Eurostat, the E.U. statistics agency. Euro area growth was down from 0.8 percent in the first quarter.

G.D.P. growth in Germany, which has been the region’s economic locomotive, fell to 0.1 percent compared with the previous quarter, when the economy expanded 1.3 percent, the German Federal Statistical Office said. Analysts had expected growth of 0.5 percent.

Those gloomy statistics followed news on Friday that showed the French economy, Europe’s second-largest after Germany’s, did not grow at all in the second quarter. Slower growth means that tax receipts will also grow slowly, which will make it harder for Germany and France to support countries like Italy and Spain that are finding it increasingly difficult to borrow money at interest rates they can afford.

Greece is already in recession, while growth in Spain is slowing down more than expected this year. The Portuguese government expects the economy to contract 2.3 percent this year, compared with a previous forecast for a 2 percent decline.

German and Italian shares led a broad decline in European stocks Tuesday. Germany’s DAX index closed down 0.45 percent, while the FTSE Italia index shed 0.87 percent. France’s CAC 40 was 0.25 percent lower and Spain’s IBEX slipped 0.40 percent.

The S.P. 500 was down 1.40 percent in afternoon trading in the United States.The euro fell 0.48 cents to $1.4396.

Both leaders also flatly rejected — for now — an idea that has recently gained currency among a growing number of economists: The creation of new government bonds backed by all the nations of the euro zone.

“What we are proposing here is the means with which we can solve the crisis right now and win back trust, step by step,” Mrs. Merkel said. “I do not think euro bonds will help us in this.”

Mr. Sarkozy said he would not rule out euro bonds at some point in the future, but said greater coordination of economic policy among euro zone members was a necessary first step.

“Euro bonds can be imagined one day, but at the end of the European integration process not at the beginning,” Mr. Sarkozy said.

Euro bonds are a deeply controversial idea among both economists and ordinary Europeans. Critics say that they would not solve the financial crisis, and might create unbearable political tension instead. Voters in stronger countries would balk at assuming the obligations of less-prudent members. Some critics argue that euro bonds would unfairly raise borrowing costs for countries like Germany, and, rather than protecting the euro, could lead to the breakup of the currency union.

Article source: http://feeds.nytimes.com/click.phdo?i=7d91043b24e4fd068b47541346eef4c9

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