France, Germany urge election of eurozone leader

Angela Merkel of Germany Angela Merkel of Germany
By Don Melvin and Sarah Dilorenzo
Associated Press / August 18, 2011

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BRUSSELS - The leaders of France and Germany said yesterday that they want the heads of the eurozone countries to elect the president of a new “economic government’’ who would direct regular summits to respond to the continent’s financial crisis.

For many in the markets, the proposal fell short of hopes: a grand plan to save the euro and, in particular, a sign the eurozone was moving toward a single bond issued by the 17 countries.

French President Nicolas Sarkozy and German Chancellor Angela Merkel outlined their proposals in a letter to Herman Van Rompuy, president of the European Council. They said that they hoped Van Rompuy would get the job.

The two leaders, who met in Paris on Tuesday, called the twice-yearly summits “the cornerstone of the new economic government of the eurozone.’’

Sarkozy and Merkel also raised the politically sensitive issue of pensions, saying eurozone states should rapidly implement structural reforms, including changes in retirement policy. They did not elaborate.

As global stocks fell, shares in stock exchange operators were hit particularly hard on news the two leaders want to introduce a tax on financial transactions. Deutsche Boerse slid 3.7 percent and the London Stock Exchange Group was down 4.7 percent. Merkel and Sarkozy said the two countries’ finance ministers would come up with a proposal by September that would be forwarded to the European Commission.

A transaction tax - a small percentage taken from foreign exchange and share transactions, for instance - has been proposed as a source of money to pay for bank bailouts. But European Central Bank head Jean-Claude Trichet says it would only work if introduced globally. The United States is also against the idea.

Merkel’s spokesman, Steffen Seibert, said the proposals would bring a “higher level of commitment’’ to efforts to stabilize budgets and fight debt. Yet yesterday’s letter seemed to back away from the boldest proposal Sarkozy had put forward a day earlier - the creation of a eurozone economic government. The letter gave few details and described it primarily as a reinforcement of current policies.

Analysts said the proposals would do little to pull Europe out of its quagmire.

“It’s all very long-term stuff, which is why the outcome’s been quite disappointing,’’ said Jennifer McKeown, a European economist at Capital Economics. “It doesn’t address the current problems.’’

She said Sarkozy and Merkel had avoided the only real solution: a close fiscal union in which struggling countries could receive aid quickly without long negotiations. The eurobond would be one likely outcome of a closer union and would allow weaker countries to borrow more cheaply since the bonds would be backed by the entire eurozone. It might, however, raise costs for a powerhouse like Germany.

The absence of new, short-term measures left the job of fighting the crisis in the hands of the European Central Bank for at least the next several weeks.

The bank is buying Italian and Spanish bonds on the secondary market, driving down their 10-year borrowing costs, which had been rising to perilously high levels above 6 percent.

Last week the bank bought $32 billion of bonds in the markets, getting the yields on Italian and Spanish 10-year bonds down to the 5 percent level -considered manageable for now.

There are questions about how long the bank can maintain the practice, which puts the default risk of both countries onto its balance sheet and risks blurring the roles of central banks and government budget authorities.

Trichet has indicated that the bank expects the $625 billion European Financial Stability Facility to take over the purchases as soon as national parliaments approve giving it that authority, which is expected in September.