Under pressure to find fresh ideas to tackle the burgeoning debt crisis in the eurozone, French President Nicolas Sarkozy and German Chancellor Angela Merkel have proposed the creation of a body to govern the bloc’s economic policy.
The French leader announced the idea to reporters after more than two hours of talks with Merkel in Paris on August 16.
"The first of these [French-German] proposals consists of establishing a true economic government of the eurozone," Sarkozy said. "This economic government will consist of a council of the heads of state and government [of the eurozone nations]. It will convene twice a year and, if necessary, it will elect a president for a 2 1/2-year fixed term."
Sarkozy said the body would meet more frequently in times of financial crisis and would be initially headed by EU President Herman Van Rompuy. After that, he suggested, the position could be opened up to other European leaders.
The proposal, which will be officially presented to eurozone nations in September, is being presented as a step toward closer long-term economic integration that many analysts say is needed for the euro to survive.
Amid the debt crisis in Greece and increasing concern about the health of the Spanish and Italian economies, the two leaders also proposed that all countries using the common European currency should have mandatory balanced budgets.
"We also propose that the 17 members of the eurozone adopt a golden rule before or during the summer of 2012 that would include prescribing in the constitutions of all of the 17 member states that their financial regulations must be in line with the goal of returning to balanced budgets," Sarkozy said.
Tax On Financial Transactions
Merkel and Sarkozy also agreed to float a proposal for an EU-wide tax on financial transactions in September and pledged to better coordinate their countries’ corporate tax policies.
The joint proposals are aimed at showing wary investors and wary European publics that the zone’s two largest members are "marching in lockstep" to protect the euro.
"Germany and France feel absolutely obliged to strengthen the euro as our common currency and further develop it," Merkel said. "And it is entirely clear that, in order for this to happen, we need a stronger interplay of financial and economic policies in the eurozone."
Some economists were also quick to express doubt that the bold plans could actually be implemented, noting that governments might not want to surrender their rights to set tax and budget policies.
At least for now, the two leaders also ruled out issuing common government debt bonds. Some investors had hoped for "eurobonds" to integrate the bloc's various economies and ease fears about surging borrowing costs for its members.
Germany has said the measure would push up borrowing costs for Germany and reduce incentives for weaker eurozone members like Greece to reform their economies.
Sarkozy and Merkel also said there was no need to boost the eurozone's rescue fund beyond the existing 440 billion euro level ($633 billion).
Value Of Euro Dips
A number of financial analysts said lack of progress on a “eurobond" and no increase in the rescue fund meant that the meeting would do little to calm jittery world markets.
Indeed, the value of the euro dipped and U.S. and Japanese stocks fell on August 17 amid continuing concerns about the economic health of Europe and the United States.
The euro fell to $1.43 in Asian trading, down from $1.44, while Tokyo's Nikkei average was down 1 percent. On August 16, the major U.S. stock indices all closed lower, ending three days of gains.
Merkel and Sarkozy have been pressed to come up with ideas to restore financial market confidence after a year and a half of turmoil has refused to die down.
The leaders were meeting as new European financial data added to fears that the global economy is slowing down more than expected.
According to figures released on August 16, the German economy -- the largest in Europe -- grew by a meager 0.1 percent between April and June. The market forecast was that the economy would grow by 0.5 percent during the last quarter.
The data shows that Germany's economic growth was slower even than debt-ridden Spain, which expanded by 0.2 percent in the same period.
Europe's second-largest economy, France, announced last week that its economy stagnated in the second quarter, following 0.9 percent growth in the first.
Sarkozy last week broke off a holiday to plan austerity measures and combat rumors that France was to lose its AAA credit rating.
The European Union data office shows that in the past three months, economic growth across the 17-nation eurozone slid back to 0.2 percent -- slower than expected -- from 0.8 percent in the first quarter of 2011.
written by Richard Solash and Farangis Najibullah, with agency reports