Leaders demand ‘euro governance’

16 August 2011 Last updated at 13:06 ET

Ms Merkel and Mr Sarkozy disappointed markets

The French and German leaders have called for “true economic governance” for the eurozone in response to the euro debt crisis.

Speaking at a joint news conference, German Chancellor Angela Merkel and French President Nicolas Sarkozy urged much closer economic and fiscal policy in the eurozone.

Ms Merkel said that further integration would be a “step-by-step” process.

They also advocated a tax on financial transactions to raise more revenues.

Negative reaction

The two leaders said they wanted bi-annual meetings of the 17 heads of the eurozone governments, chaired by Herman van Rompuy, the current president of the European Council.

Markets reacted negatively to the conference, with some investors saying that they were expecting bigger announcements.

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In New York, the Dow Jones Industrial Average fell 0.5% during the press conference, which took place after the close of trading in Europe.

Government bonds in the US and Germany – seen as safe havens in any economic downturn – rallied in reaction to the leaders’ comments.

Ms Merkel again played down the chances of introducing “eurobonds” – jointly guaranteed debts of the 17 eurozone governments – as a solution to the crisis.

The idea has been advocated by the Italian finance minister, Giulio Tremonti, as well as billionaire investor George Soros as a way of providing cheap financing to struggling governments while also incentivising them to put their finances in order.

But the German chancellor said she only saw such a move coming at the end of a long process of fiscal union.

Growth fears

The pair were meeting in the wake of last week’s turmoil on the financial markets, which came amid fears of a renewed global recession and of the ability of Spain and Italy to repay their debts.

Earlier on Tuesday, Germany revealed that its economy grew by just 0.1% in the three months to June, much weaker than previously thought.

Germany had been driving the economic recovery in the eurozone.

Both French and German leaders, along with the European Central Bank, are putting pressure on so-called peripheral economies to extend austerity measures to try to balance their budgets.

Major economies are also making cuts – Italy announced tougher austerity measures designed to reduce its budget deficit on Friday, while Spain has also said it will speed up spending cuts.

However, there are fears that spending cuts by governments will undermine overall economic growth.

In an article published in the Financial Times newspaper, the head of the International Monetary Fund, Christine Lagarde, warned governments that they must balance spending cuts with measures to support growth to avoid the risk of a double-dip recession.

Ms Lagarde acknowledged the need for governments to reduce debt levels, but said “slamming on the brakes too quickly would hurt the recovery and worsen job prospects”.

It could also undermine further the confidence of international investors, she said.

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