German Chancellor Angela Merkel's meeting with French PresidentNicolas Sarkozy today comes as investors clamor for indicationsthat they will do more to stamp out the euro area's debt crisis astheir economies sputter.

After a July 21 European Union agreement to bolster the region'srescue fund failed to calm markets, calls are growing for theleaders to begin discussing joint borrowing or a mutual guaranteeamong the 17 euro states, policies that both countries haverejected until now. While not on the agenda, the issue willprobably come up at a joint press briefing scheduled for 6:30 p.m.Paris time after the talks.

Merkel and Sarkozy may announce proposals that “go in thedirection” of joint euro-area bonds, Peter Bofinger, an economicadviser to the German government, said in an interview today onBloomberg Television. “They cannot end this day empty handed. Ithink they have to deliver something.”

Today's meeting in Paris was announced last week as debtconcerns rattled France, the second-largest euro economy afterGermany. Doubts over France's AAA credit rating hammered shares inthe country's banks and sent the risk premium of its governmentbonds above Germany's to a euro-era record as the European CentralBank began buying Spanish and Italian debt.

“We're moving toward a situation where it's either euro bonds orbust,” said Nick Kounis, head of macroeconomic research at ABN AmroNV in Amsterdam. “We're on the verge of extreme outcomes.”

Budget Enforcement
The talks betweenMerkel and Sarkozy will focus on proposals to tighten enforcementof EU budget rules and expand coordination of national economies,according to French Finance Minister Francois Baroin.

Budget consolidation is paramount and joint bonds are not atopic for discussion, Merkel's chief spokesman, Steffen Seibert,said yesterday, warning against expectations of a “big bang” fromthe meeting. “It is and remains a process,” he told reporters inBerlin.

Seibert declined to say whether short-selling will be discussedafter France, Spain, Italy and Belgium banned the practice fromAug. 12 to stabilize markets, a move that prompted Germany to renewcalls for a “far reaching” European ban on some forms ofshort-selling.

'Key Thing'
“The key thing that can besent by Merkel and Sarkozy is that they are now beginning toconsider these things very seriously,” Myles Bradshaw, aLondon-based money manager at Pacific Investment Management Co.,said in an Aug. 12 interview with Maryam Nemazee on BloombergTelevision. “A signal from Merkel would signal greater comfort inthe market with the idea that the Germans are actuallychanging.”

The German economy, Europe's largest, almost stalled in thesecond quarter, growing 0.1 percent, as the debt crisis weighed onconfidence, data released today showed. France, the second largest,didn't grow in the same three months.

Unprecedented bailouts by governments totaling 365 billion euros($522 billion) in emergency loans and ECB bond purchases havefailed to stamp out the crisis. Faltering investor confidence mayovercome the unwillingness of euro leaders to forge a U.S.-stylefiscal union. Opponents don't want to relinquish control of theirown budgets or risk the higher borrowing costs that wouldresult.

Last week's market volatility prompted Sarkozy to return toParis from his vacation for a day to meet top officials and outlinean accelerated schedule to announce 2012 budget cuts. It forcedBank of France Governor Christian Noyer to issue a statement thatbanks were solid and well-capitalized.

Tremonti's Backing
As the week ended,Italy announced extra budget cuts that were demanded by the ECB,and Finance Minister Giulio Tremonti repeated his endorsement ofeuro bonds. That view is shared by counterparts including the headof the group of euro-area finance ministers, Luxembourg'sJean-Claude Juncker.

A French official last month said there isn't enoughcoordination among national economic policies to justify jointlysold bonds.

German Finance Minister Wolfgang Schaeuble told Der Spiegel inan interview published on Aug. 13 that he opposed unlimited aid,including joint borrowing. “There is no collectivization of debt orunlimited support,” he told the German magazine.

Merkel last directly addressed the topic in 2010, tellingreporters in Berlin on Dec. 6 that EU treaties don't “allow eurobonds, as far as we're concerned.”

Since opposing any financial aid for Greece in early 2010,Germany has bowed to the requirements of the moment. Officials havesince indicated the rejection of euro bonds isn't ironclad.

'Foreseeable Future'
Deputy ForeignMinister Werner Hoyer said in a July 20 interview Germany may notresist common bonds “forever” if the euro area were threatened.While euro bonds “are not the right solution for now,” thegovernment is talking in terms of “the foreseeable future” ratherthan on a permanent basis, Peter Altmaier, deputy parliamentaryleader of Merkel's Christian Democrats, said on Deutschlandfunkradio yesterday.

Anton Boerner, head of Germany's BGA exporters association, cameout in favor of “euro bonds with a German stamp” yesterday. Themain opposition Social Democrats and the Greens already back themeasure, with Greens co-leader Juergen Trittin last week callingeuro bonds the “only way” to end the crisis.

Merkel is examining whether euro bonds could help end thesovereign debt crisis, the Sueddeutsche Zeitung reported today,without quoting anyone. Germany's biggest-selling Bild newspapercame out against euro bonds, saying in today's edition that theirintroduction would be “explosive for our currency and the coalitionin Berlin.”

The road to euro bonds runs through the German parliament, whichmay mean a long slog. Ruling coalition lawmakers last week rejecteda further expansion of the 440 billion-euro rescue fund orintroduction of joint bonds to staunch the debt crisis.

Merkel's Free Democratic Party coalition partner will balk atany such measure, FDP lawmaker Frank Schaeffler told Bild. Hesuggested that any attempt to introduce euro bonds with the help ofthe opposition might break the coalition. For Merkel, “there's noalternative majority,” he said.

Bloomberg News

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