Sarkozy, Merkel to meet on debt crisis, market tensions

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France's Nicolas Sarkozy will meet Germany's Angela Merkel on Tuesday amid market dismay over the eurozone debt crisis but Berlin warned not to expect a breakthrough on financial reforms.

France's jittery stock market dropped briefly back into the red when Germany said the idea of creating eurozone bonds to spread the pain of member states' debt problems would not be on the agenda in Paris.

Merkel and Sarkozy lead the 17-nation eurozone's two biggest economies and markets are watching anxiously to see whether they can boost confidence amid an unprecedented sovereign debt crisis.

Last week, European stock markets saw their worst losses since 2008 on rumours that France might lose its Triple A credit rating and as the European Central Bank had to intervene to buy Italian and Spanish government bonds to help ease the pressure on their borrowing costs.

Sarkozy has been pushing for a more centralised system of controls across the eurozone, better able in Paris' eyes to protect against future meltdowns.

But Merkel -- and German voters -- oppose any bid to create what they dub a "transfer union" in which Germany's powerful export-led economy effectively underwrites its underperforming eurozone partners.

Such a system would make it easier for struggling members like Greece or Portugal to finance massive public deficits but would also transfer some of the cost of servicing these debts to German taxpayers -- a non-starter for Berlin without a quid pro quo of tough fiscal discipline in the bloc.

On the eve of the talks, a German spokesman said the idea of "eurobonds" to pool eurozone public debt would not even be on the agenda in Paris.

"The German government does not consider it worthwhile talking about eurobonds at the present time," Steffen Seibert told reporters, briefly sending French stocks into the red before they recovered slightly.

"You are awaiting a drumroll and the brightening of the skies over Europe," he said, playing down hopes of major developments. "There won't be such a rolling of the drums at tomorrow's meeting."

The Elysee Palace later confirmed that bonds would not be discussed.

Until last week, France was seen as among the better performing eurozone economies, even if still lagging behind Germany.

But rumours, angrily denied, about a possible credit rating downgrade and the health of its banks rocked the market.

Sarkozy was forced to interrupt his holiday and fly back to Paris to propose tougher austerity measures while Merkel remained tightlipped.

French officials say he still intends to press for an "acceleration" of reforms to Europe's financial institutions and hopes he and Merkel will agree "common positions on the reform of the governance of the eurozone."

He will also push for a quicker application of decisions made last month, when European leaders found another 159 billion euros for a second Greek bailout.

The ECB last week began buying up government bonds issued by eurozone members in a bid to protect weaker members from speculative attacks -- snapping up 22 billion euros as it headed off growing pressure on Italy and Spain.

That brought the total the ECB has spent to 96 billion euros.

Over the weekend, German officials were quick to dampen any talk of broader commitments -- rejecting both the idea of issuing joint eurobonds or of further expanding the 440-billion-euro European Financial Stability Facility.

"There is no sharing of debts and not an infinite amount of aid," Finance Minister Wolfgang Schaeuble told Der Spiegel. "There are support mechanisms that we will continue to elaborate under strict conditions."

Merkel and Sarkozy are to meet in Paris in the afternoon, then hold a press conference before sharing a working dinner. Afterwards, they will make recommendations to European Union President Herman Van Rompuy, Seibert said.

Sarkozy will meet his cabinet on Wednesday and on August 24 he is due to unveil austerity measures designed to bring France's budget deficit down to less than three percent of gross domestic product, the EU limit, by 2013.


© 2011 AFP

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