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News : EU Economy Last Updated: Aug 18, 2011 - 6:13 AM

Merkel and Sarkozy propose a 'true economic government' for the Eurozone
By Finfacts Team
Aug 17, 2011 - 6:21 AM

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Nicolas Sarkozy, the French president and Angela Merkel, the German chancellor, meeting in the Palais de l'Élysée, Paris, Tuesday, Aug 16, 2011.

Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, on Tuesday agreed to establish a 'true economic government' for the Eurozone, on a day when Germany, the biggest economy, reported that economic growth had fallen to almost a standstill in the second quarter of the year.

Following a two-hour meeting in Paris, the two leaders address a press conference and the German chancellor reaffirmed that eurobonds -- which would have bonds issued by the single currency area rather than each individual country -- were not part of the solution. Rather, the goal is to solve the debt crisis in a step-by-step fashion: "I do not believe that eurobonds would help in that regard," she said.

The French president however said eurobonds could be a possibility in the future: "Perhaps one could imagine such bonds at some point in the future at the end of a process of European integration. But not at the beginning" of it.

In the short-term, Germany would have to bear higher interest costs before agreement with the other 16 countries of the European Monetary System (EMU) had been reached on stricter rules of governance.

The two leaders also pledged to work on integrating financial and economic policies; they proposed a tax on financial transactions in the 17 Eurozone countries from the mid 2012, and they called for closer joint governance of economic policy. They also proposed that work should commence on moving towards a common corporation tax by 2013. A twice yearly summit of Eurozone leaders would be held, and the economic government would be led by Herman Van Rompuy, current president of the European Council.

Merkel said the goal is to "strengthen the euro as our common currency. In order for it to succeed, we need a strong integration of finance and economic policies in the Eurozone."

She added, "The euro is our future, it is the foundation of our prosperity. And it contributes to our peaceful coexistence."

“We have to converge,” said Sarkozy. “The status quo is impossible.”

The leaders also want all member countries of the EMU to provide for balanced budgets as a constitutional requirement.

Merkel described the euro rescue fund, the European Financial Stability Fund (EFSF), as a "European Monetary Fund," and she said it would be provided with "analytical capacities."

The Eurozone grew by only 0.2% in the second quarter; German growth was flat and French growth was at a standstill.

Chancellor Merkel said she was not pessimistic about economic prospects. She said she believed there would be significant growth for the total year for both Germany and France.

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