Merkel, Sarkozy want tighter EU budget controls

The French and German leaders called Tuesday for all countries using the euro to have mandatory balanced budgets and better co-ordination of economic policy.

French President Nicolas Sarkozy and German Chancellor Angela Merkel also pledged to harmonize their countries' corporate taxes after meeting in Paris.

Sarkozy said he and Merkel want a "true European economic government" that would consist of the heads of state and government of all eurozone nations.

The new body would meet twice a year and be led by EU President Herman Van Rompuy.

The moves appeared aimed at showing the eurozone's largest members are "marching in lockstep" to protect the euro, and are more focused on long-term political solutions instead of immediate financial measures like a single European bond.

"We want to express our absolute will to defend the euro and assume Germany and France's particular responsibilities in Europe and to have on all of these subjects a complete unity of views," Sarkozy told a news conference.

Merkel told journalists the idea of issuing eurobonds to pool eurozone members' debts was not a solution for "today."

Sarkozy said such an instrument would put Europe's stronger economies "in grave danger" and would only be possible at the "end of a process of integration."

Markets lower

The two also agreed to float proposals in September for a tax on financial transactions.

The leaders want the new budget rules to be enshrined in euro zone constitutions by summer of next year. They said a common French-German corporate tax would be established by 2013.

European markets had closed by the end of the talks. But North American investors appeared disappointed by the outcome, with the S&P/TSX composite losing 1.2 per cent to 12,530.71 and the Dow Jones Industrial Average closing lower by 0.7 per cent to 11,405.93.

Crude oil futures fell by as much as 2.6 per cent and investors seeking refuge in gold pushed the December contract up $27, or 1.5 per cent, to $1,785.00 US an ounce. The euro was down 0.3 per cent to $1.4406 US.  

Investors may be concerned about how the euro bloc will put in place what its leaders have suggested, as well as how a proposed tax on financial transactions may affect demand for European assets, said David Gilmore of Foreign Exchange Analytics in Essex, Connecticut.

"On the surface, it sounds very bold, a federal 'eurozone,' " Gilmore said. "The practical part still seems, to me anyway, to be a pipe dream."

"Investors might be left wondering what was the point of this meeting," said Neil MacKinnon, economist at VTB Capital in London. MacKinnon said the measures outlined amounted to "well-intentioned rhetoric" but are not the "silver bullet" needed to settle Europe's debt and banking crisis once and for all.

The talks came as new figures showed economic growth in the region all but stalled even before last week's turmoil on the financial markets.

Eurozone grows 0.2%

Economists attribute much of the economic turmoil to Europe's failure to come up with a convincing plan to deal with massive government debts.

Eurostat, the European Union's statistics office, reported that the combined economies of the 17 countries that use the euro eked out meagre growth of 0.2 per cent in the second quarter.

Previously robust expansion in Germany and France — which make up nearly half of the region's output — almost ground to a halt.

Growth rate was well short of the 0.8 per cent recorded in the first quarter, largely due to an abrupt slowdown in Germany.

Germany's economy has helped support the eurozone through the government debt crisis. Its world renowned companies have tapped export markets all around the world, particularly in faster growing emerging countries.

Slower growth worsens debt crisis

Europe's slowing growth prospects complicate the debt crisis, because slower growth makes it even harder for governments to shrink debt and to serve as creditors and back increased bailouts.

It also shrinks potential export markets for countries, like Greece, mired in recession.

"The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy," said Lloyd Barton, senior economic advisor to Ernst & Young.

"A further deterioration in financial conditions could severely damage the outlook for the whole of the eurozone."

France was caught in the market crossfire last week, with investors worrying about the financial health of the country's banks in particular and whether it would be the next country after the U.S. to lose its triple-A credit rating.