Merkel, Sarkozy to try to tame debt crisis

Associated Press
FILE - In this Dec. 10, 2010 file photo, French President Nicolas Sarkozy and German Chancellor Angela Merkel talk at a press conference during the German-French consultations in Freiburg, Germany. Chancellor Merkel travels to Paris Tuesday Aug. 16, 2011, armed with plans for a new EU body to enforce strict budget limits and fiscal policy and calls for all eurozone nations to enshrine a balanced budget in their constitution. (AP Photo/Michael Probst,File)
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PARIS (AP) — The leaders of Germany and France are discussing Tuesday how to get the eurozone's 17 countries to work closer together to address Europe's debt crisis as further evidence emerged of a marked economic slowdown.

The meeting in Paris comes after a week of turmoil in financial markets, largely blamed on Europe's sprawling government debts and worries that European leaders aren't doing enough to address them. It also comes a day after the European Central Bank revealed that it splashed out more money than ever trying to appease the markets.

Unsettling signs over Europe's growth prospects — especially those of its two biggest economies — overshadow the meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy. Figures released Tuesday show Germany's economic growth was just 0.1 percent in the second quarter; France announced last week that its economy ground to a halt in the same period.

Fears that Italy and Spain, the eurozone's third and fourth largest economies, may find it too expensive to service their debts triggered last week's intervention in the bond markets from the ECB, which has increasingly stepped in as Europe scrambles.

France and Germany, which together account for almost half of the eurozone's economic output, are taking the lead in pushing for reforms. But, speculation that the two leaders would consider proposals for the eurozone to issue jointly guaranteed government debt appear to have been dashed, with officials for both sides indicating that would not be on the agenda.

Germany has remained firm in its stance that other EU countries must exert more fiscal discipline.

The discussions will center on "measures for better agreement of financial policies," Merkel's spokesman Steffen Seibert said.

Officials for both Merkel and Sarkozy said Monday that jointly guaranteed eurobonds would not be on the agenda.

Eurobonds would be a major step toward the bloc's economic integration, and are billed by supporters as an overnight solution to the crisis. Italy, Greece, Belgium and Luxembourg are among the nations calling for eurobonds. However, Germany has been adamantly against their creation, saying the EU cannot have a one-size-fits-all policy.

Analysts forecast that Tuesday's meeting could set the stage for future political decisions about the euro and European integration, but no immediate breakthroughs.

"Don't expect any game-changers from today's meeting," said Neil MacKinnon, global macro strategist at VTB Capital. "The eurozone debt and banking crisis has yet to be properly resolved, and the future viability of monetary union is a choice between moving towards fully fledged fiscal union or considering the possibility of a break-up in monetary union."

German Finance Minister Wolfgang Schaeuble told the German news magazine Der Spiegel that eurobonds were out of the question as long as the currency zone's 17 nations still run their own budget policies.

With Europe still scrambling to come up with measures that appease the markets, the European Central Bank has been taking a more central role in dealing with the crisis, that has already seen Greece, Ireland and Portugal bailed out.

It revealed Monday that it spent euro22 billion ($32 billion) in the bond markets. Analysts think a large chunk, if not all, of that money was spent propping up the bond prices of Italy and Spain, which had seen their borrowing costs ratchet up sharply in the preceding weeks.

European growth prospects are another concern. Until now Germany's economy, Europe's biggest, had been growing strongly despite Europe's government debt crisis.

The chief of the International Monetary Fund urged rich-country governments not to squeeze their budgets so far that they stifle growth.

"For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans," Lagarde wrote in the Financial Times. "At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects."

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.

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Baetz reported from Berlin; AP Business Writer David McHugh also contributed from Frankfurt.

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