Sarkozy and Merkel revealed plans for a stronger fiscal union in the euro-zone but disappointed investors who hoped to see bigger steps, such as the issuance of Eurobonds or the expansion of the 440 billion euro rescue fund. Markets reacted negatively following the announcement.
They proposed that the EU nations have closer cooperation through mandatory balanced budgets, suggesting stricter adherence to euro zone rules and fiscal targets.
"The euro has allowed us a lot of economic progress but the euro is not just a right, it's a set of rules, a duty, a discipline," said Sarkozy during a joint news conference with Merkel. "Consequently if the rule is to be adopted by the 17, it will not be an optional rule but obligatory.”
Stronger economic governance will be implemented through the creation of a European economic government made up of the council of the heads of states and governments of the 17 euro-zone economies. A president will be elected every two and a half years, and the council will meet twice a year.
A proposal was also made to have a common corporate tax in France and Germany in 2013, and the possibility of a financial transaction tax was introduced,
The idea of Eurobonds, which have been popular with financial experts as a solution to deal with the debt crisis and restore investor confidence was rejected by both Sarkozy and Merkel.
“Euro bonds can be imagined one day, but at the end of the European integration process, not at the beginning," Sarkozy added.
Analysts believe that the proposals made will not be enough to restore confidence in the European markets.
Analysis: Sarkozy and Merkel push euro integration, no joint bonds [Reuters, 17 Aug 2011]
“European leaders haven’t addressed the underlying problem of deficits in the individual countries and the exposure for banks and the crisis is set to bubble on,” said Derek Mumford, a Sydney-based director at Rochford Capital, a foreign-exchange and rates risk management firm. “Everything that’s going on in Europe would make it the sickest one at the moment. The euro is possibly at the top end of its range.”
However, some believe that a stronger fiscal union is a step in the right direction.
"Sarkozy talks about common governance for the euro zone, which I think is one step closer toward a fiscal union. That's positive for the euro overall," said currency strategist Richard Franulovich at Westpac in New York.
Germany, the political and economic powerhouse that has been driving the euro-zone bail outs, has seen its growth slowed down to just 0.1% in the second quarter, below expectations.
Additionally, France has had to assuage fears that it would lose its AAA credit rating with its exposure to Italian debt.
Though the meeting between Sarkozy and Merkel was already planned beforehand, pressure for results rose when fears over France’s credit rating last week battered markets.
Report: Euro falls after Sarkozy, Merkel reject euro bonds, before cpi [Businessweek, 17 Aug 2011]
Report: Sarkozy, Merkel plan fails to inspire Wall St [Reuters, 17 Aug 2011]
Report: Franco-German call for 'true euro economic governance' [BBC, 17 Aug 2011]
Report and Analysis: Exchanges Drop As Merkel, Sarkozy Talk EU Trading Tax [WSJ, 17 Aug 2011]