Merkel, Sarkozy Shun Euro Bonds in Call for More Integration

Angela Merkel and Nicolas Sarkozy
Germany's chancellor Angela Merkel, left, speaks during a news conference with France's president Nicolas Sarkozy. Photographer: Fabrice Dimier/Bloomberg

German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected an expansion of the 440 billion-euro ($633 billion) rescue fund and rebuffed calls for joint euro borrowing to end the debt crisis, saying greater economic integration was needed first.

The leaders of Europe’s two biggest economies agreed to press for closer euro-area cooperation, tougher deficit rules and a harmonization of their corporate tax rates. A plan to resubmit a financial-transaction tax, which the European Union rejected in 2010, sent European stocks lower.

Sarkozy and Merkel spoke after a two-hour meeting in Paris yesterday as investors clamored for indications that they would do more to end the euro-area debt crisis amid a slowdown in their economies. Unprecedented bailouts by governments and the European Central Bank have so far failed to stamp out concerns that rattled markets in AAA-rated France last week.

“What they say is not going to work,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “We could easily be back in September with them discussing either expanding the fund to 1.5 to 2 trillion or committing to a euro bond by 2013 or facing breakup. The politicians have their heads in the sand again.”

With Sarkozy proclaiming their “absolute determination” to defend the euro, the leaders proposed debt limits be written into national law and establishing a “euro council” to be headed by European Union President Herman Van Rompuy as part of a planned “economic government” for Europe. Van Rompuy declined immediate comment.

EU Rules

Plans to toughen deficit rules and establish constitutional balanced-budget provisions are already working their way through the EU machinery.

“It’s very obvious that in order for this to work we need a stronger convergence in finance and economic policy within the euro zone, and Germany and France are at the vanguard of that effort,” Merkel told reporters.

Shares of financial firms and securities exchanges fell after Sarkozy said finance ministers would be charged with developing a transaction tax, which he called a “priority.” He didn’t provide details or specify if the levy would apply to euro countries or all 27 in the EU, which includes Britain.

Stock Exchange Owners

Deutsche Boerse AG, which is merging with NYSE Euronext, the New York Stock Exchange owner, lost as much as 4.9 percent. NYSE Euronext slid 8.4 percent in New York trading yesterday. Nasdaq OMX Group Inc., which operates venues in Nordic countries, fell 2.8 percent, IntercontinentalExchange Inc., owner of ICE Futures Europe in London, shed 4.5 percent.

The euro weakened 0.5 percent to $1.434 at 9:10 a.m. in Berlin.

EU finance chiefs failed to agree in September 2010 on a transaction tax, which Merkel pushed to help repair the damage to national budgets caused by the banking crisis. “It’s politically desirable and it’s financially unpredictable,” International Monetary Fund Managing Director Christine Lagarde, then French finance minister, said at the time.

Any proposal for cross-border taxes in the EU requires unanimity among governments. French leaders have proposed a version of the levy, known as a Tobin Tax, since 2001.

Sarkozy and Merkel revived the tax as one element of a four-part package they proposed to expand economic cooperation and restore confidence that Europe will be able to reduce its debt load and curb its national budget deficits. In France and Germany, government debt totals more than 80 percent of gross domestic product, compared with the EU ceiling of 60 percent. In Greece, it’s headed to more than 160 percent.

‘Work Steadily’

“We need to work steadily and step by step to win back confidence,” the German Chancellor told reporters.

That may not be fast enough for investors who sent borrowing costs to euro-era records in Italy and Spain this month, forcing the ECB to aid the euro region’s third- and fourth-biggest economies and triggering calls for euro bonds and an expansion in the bailout fund, the European Financial Stability Facility.

Sarkozy said announcing an increase in the rescue pool risked backfiring.

“If we tripled the fund, then at the next press conference you would ask us ‘why didn’t you multiply it by four,’” he said. “We’re trying to manage it seriously and reasonably. We believe the fund is sufficient.”

Red Line

Their willingness to consider euro bonds, or joint guarantees among the 17 euro nations, underscored how far the euro’s leaders have moved in the past two years, as they erased what had been a red line.

“We suspect it would have been ruled out much more completely just weeks ago,” said Malcolm Barr, a London-based economist at JPMorgan Chase & Co.

Euro bonds would provide market access to those now shut out, such as Greece and Ireland, and raise borrowing costs in the top-rated countries.

“We could imagine having euro bonds one day, but at the end of a European integration process, not at the beginning of an integration process,” Sarkozy said.

“In the current state of European institutions, we do not have the democratic legitimacy to do so,” he said. “Euro bonds may be the outcome of an integration process, not the prelude. They would seriously threaten the most stable euro-zone countries with the top ratings and they would then have to guarantee debt that they do not control.”

‘Healthy Dose’

While “a healthy dose of skepticism” is warranted as to whether the German and French leaders can achieve closer integration, their announcement showed “a clear and pragmatic grasp of the steps needed to keep the Euro zone alive,” said Marco Annunziata, chief economist at General Electric Co.

“The steps needed to ensure greater fiscal and economic integration may seem so daunting as to be beyond the powers of EU leaders,” he said. “But as the alternative would most likely be a disintegration of the Euro zone and the collapse of the decades-long European project, they will be taken.”

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