Germany, France vow to defend euro

Associated Press
France's President Nicolas Sarkozy and German Chancellor Angela Merkel are cheered by children on the Munster Square in Freiburg, southern Germany, Friday, Dec. 10, 2010. President Nicolas Sarkozy and Chancellor Angela Merkel met on Friday to prepare joint Franco-German positions for next week's EU summit .  (AP Photo/Philippe Wojazer, pool)
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France's President Nicolas Sarkozy and German Chancellor Angela Merkel are cheered by children on the …

The leaders of Germany and France vowed Friday to defend the euro with "total" determination from the turmoil of Europe's government debt crisis — but stood by their rejection of raising money through pan-European bonds or expanding a euro750 billion ($1 trillion) rescue fund.

The two countries, the eurozone's largest economies and its bankrollers, are at odds with many other governments on how best to keep the crisis from spreading and forcing more expensive bailouts, following financial rescues for euro members Ireland and Greece.

"Let one thing be very clear: We are deeply attached to the euro," said French President Nicholas Sarkozy, speaking alongside German Chancellor Angela Merkel at a news conference. "We will defend the euro, because the euro is Europe."

"Our determination is total, both in Germany and France," he added, saying the nations were prepared to undertake all necessary steps to defend the currency.

The two leaders and several of their key ministers met for regular consultations amid heavy security in Freiburg, near the French border, ahead of an important European Union summit in Brussels next week.

A key issue at the summit will be the establishment of a permanent crisis mechanism for the 16-nation eurozone starting in 2013 that will require amending current EU treaties — usually a lengthy and complicated procedure.

Merkel has pressed hard for such a mechanism, which would include a set of new bailout rules that would force losses on private investors in some cases — an idea that rattled markets when Germany and France first presented it at their last bilateral summit in France two months ago.

The current euro750 billion rescue fund — now being tapped to rescue Ireland — expires in 2013, and Merkel opposes extending it without changes.

There has been talk recently of increasing the fund's size, but France and Germany oppose that and Merkel reiterated Friday that the question "doesn't arise now ... as Ireland is using less than 10 percent of the rescue fund's means."

But Merkel left no doubt that Germany, Europe's biggest economy, was equally determined to defend the 16-nation currency. She said its significance goes "far beyond" solely being a monetary union.

"If the euro fails, Europe fails," she said. "This is a deeply serious matter for me. And that's why Germany will do everything to defend the euro jointly with the other (countries)," she added.

Italy and Luxembourg, whose premier also heads the bloc of eurozone nations, have championed the idea of pan-European bonds that would support governments with shaky finances. But financially sound Germany is adamantly opposed, and has been joined in that by France.

"If it's about increasing Europe's debt, that would have the effect of taking responsibility away from each state," Sarkozy said. "We want exactly the opposite — making states more responsible, not less responsible."

Merkel reiterated that a universal interest rate on bonds would set the wrong incentive for heavily indebted eurozone countries and hinder Europe's competitiveness as a whole. Merkel has repeatedly said that such bonds would violate the current EU treaties.

Jean-Claude Juncker, Luxembourg's prime minister and Eurogroup chief, has criticized Germany's rejection of the idea.

Juncker was quoted in Thursday's edition of the German weekly Die Zeit as complaining that the proposal was being rejected before it was even studied. "This way of establishing taboo zones in Europe and not even dealing with the ideas of others is a very un-European way of getting European business done," he was further quoted as saying.

Germany, considered a benchmark of stability, would most likely see its borrowing costs significantly rising following the introduction of eurobond, since it would lump financially strong governments in with the weaker ones.

While Sarkozy also ruled out the introduction of eurobonds under current circumstances, he said it could be discussed in the future once European states have managed to further harmonize their economic policies.

The European Central Bank has also stepped in to stabilize the troubled European sovereign debt market by directly buying almost euro70 billion worth of bonds. European officials have called for the program to be extended, but it is controversial even within the ECB's top ranks.

Mario Draghi, the head of Italy's central bank, was quoted Friday as saying the ECB is putting its independence on the line by buying eurozone government bonds.

Large-scale purchases of government bonds could threaten the ECB's freedom to act without political independence and violate the EU treaty, he said in an interview with The Financial Times.

"The primary response to a crisis should be a national response — credible fiscal action and structural reforms that relaunch growth," he told the paper.

Axel Weber, the head of Germany's central bank and another influential rate-setter at the ECB, also has repeatedly criticized the purchase of sovereign debt and urged countries to show fiscal discipline instead.

Freiburg police said a person was detained after apparently squirting water toward Merkel and Sarkozy during a walkabout in the southwestern city before their talks. But spokesman Ulrich Brecht said that "no one got wet."

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Angela Doland in Paris, Colleen Barry in Milan and Geir Moulson in Berlin contributed to this report.

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