The latest Franco-German strategy to counter the euro debt crisis stressed ideas already in the works, shunning bolder steps investors were seeking to calm markets.
German Chancellor Angela Merkel and French President Nicolas Sarkozy ruled out steps such as the issuance of euro bonds or expanding the bailout fund. They backed a plan being drawn up for national balanced-budget amendments and reheated one rejected last year for a financial-transaction tax. They called for the 17 euro leaders to hold two summits a year, the same number of times they have already met in 2011.
“There remains an ongoing tension between investors who want a quick fix and the policy makers who are working on the building blocks for the future,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group Plc. “Everyone can recognize that the building blocks are important, but stronger leadership with a clearer roadmap is sorely missing in this direction.”
Sarkozy and Merkel spoke after a two-hour meeting in Paris yesterday as investors called for signs that they would do more to end the debt storm after reports showed an unexpected slowdown in their economies. Unprecedented bailouts by governments and the European Central Bank have failed to stamp out concerns that began in Greece almost two years ago rattled markets in AAA-rated France last week.
European stocks fell today, led by financial shares. The Euro Stoxx 50 lost 0.6 percent at 12:30 p.m. in Paris. The risk premium on the most-indebted nations increased.
‘Pact for the Euro’
Merkel and Sarkozy rummaged through March’s “Pact for the Euro” -- itself a German-French invention -- to refloat calls for national debt-limit rules, steps to boost competitiveness and a tax on stock, bond or currency transactions.
Such a tax failed to win the necessary unanimity within the 27-nation European Union last year. The EU is developing proposals for the levy before a summit of the Group of 20 countries in November.
“A financial transaction tax would only work if it was implemented worldwide,” Peter Norman, financial markets minister of Sweden, said in an interview in Stockholm today. “I find it difficult to see how a transaction tax in the European Union would have any positive effects.”
Merkel highlighted the need for tougher enforcement of budget-deficit rules, including a numerical annual debt-reduction target for countries with debt over 60 percent of gross domestic product, the euro zone’s legal limit.
European laws to do just that are set to be passed next month, along with a mechanism to monitor macroeconomic imbalances such as the current-account deficits run up by Spain before the crisis.
Merkel and Sarkozy also pledged to harmonize German and French corporate taxes, a step with minimal implications for the economic outlook in Greece, Portugal and Ireland, now relying on 365 billion euros ($527 billion) in official loans to stave off default.
“The expectations going into this meeting were pretty low and I think they maybe even undershot what the expectations were,” Jay Bryson, senior global economist at Wells Fargo Securities LLC, told Bloomberg Television’s Lisa Murphy.
“You need an outside force here, you need something like a euro bond coming in here or some sort of fiscal union, to eventually stabilize the situation,” Bryson said.
Euro summits would be chaired by Herman Van Rompuy, the EU’s first full-time president. Merkel and Sarkozy proposed giving him the added title of euro-area chief for a 2 1/2-year term, indicating that they favor his reappointment as EU president when his term expires in mid-2012.
Merkel and Sarkozy said no to two varieties of fiscal union. The first would be to boost the size of the 440 billion-euro European Financial Stability Facility, the rescue mechanism created in May 2010.
“If we tripled the fund, then at the next press conference you would ask us ‘why didn’t you multiply it by four,’” Sarkozy said. “We’re trying to manage it seriously and reasonably. We believe the fund is sufficient.”
The second, deeper form of integration would be pooled borrowing by euro-area governments, a system of "euro bonds” in which triple-A countries such as Germany ultimately guarantee the debt of higher-risk governments.
Common bonds will be the “ultimate solution,” billionaire investor George Soros told Le Monde today.
Merkel’s trip to Paris came after a euro bond debate erupted in Germany, with some figures in her Christian Democratic Union joining opposition parties in endorsing at least a discussion of the idea. The German leader cut off that conversation yesterday. She and Sarkozy said joint borrowing can only come after national economies are better aligned.
The political intransigence leaves a divided ECB as the main line of defense after it last week began purchasing bonds of Spain and Italy for the first time.
“The risk is the ECB will look at the political incompetence and won’t buy any more bonds,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London.
The crisis and mounting signs of economic weakness may prevent the central bank from raising interest rates again this year, possibly forcing it to reverse this year’s half-point increases, said Willem Buiter, chief economist at Citigroup Inc.
The euro-area economy grew just 0.2 percent in the second quarter, the worst performance since emerging from recession in 2009, data showed yesterday.
“There must be a material risk now of growth completely stalling or even of recession in the euro area,” Buiter told Bloomberg Surveillance with Tom Keene and Ken Prewitt. “It will remind the ECB that it was probably premature in raising rates and they will probably have to cut rates again.”