Germany and France said Friday (17 December) they would propose plans next year to harmonise tax and labour policies in the euro zone, saying the crisis has exposed the necessity to complete monetary union with an economic union.

Speaking at a press conference after the summit, French Presidency Nicolas Sarkozy said "Mrs Merkel and myself will make proposals" in the new year to "better harmonise economic policy" in the euro zone.

The political about-face could mark the start of stronger fiscal unity among the countries that use the euro currency.

It could also be a long, but important step toward tackling differences in competitiveness and could ultimately pave the way for the creation of eurobonds.

"The discussions showed yesterday that we need a more common approach in our economic policies and we will have to talk about this in the coming months, especially in the euro zone," said German Chancellor Angela Merkel. 

"it's not just important to have solid budgets and stable finances but it is also important that we have a common economic policy."

"Step by step. It will be a long process."

The Franco-German proposals will include plans to "put in place convergence programmes" for fiscal and social policies, said Sarkozy.

The objective, he said, is to "tackle differences in competitiveness" between the 16 countries that share the single currency, adding that "social and fiscal policy form part of these differences in competitiveness."

His comments, echoed by German Chancellor Angela Merkel and Spanish Prime Minister José Luis Rodríguez Zapatero, show that many European leaders acknowledge that the creation of a new financial bailout fund isn’t enough, and that as long as national fiscal policies run the gamut, the EU’s monetary union remains vulnerable.

Bailout critics

This week, EU leaders agreed to create a permanent mechanism by 2013 to help member states in dire financial straights. The mechanism is expected to be modelled after the current €750 billion temporary fund, but is not expected to include eurobonds.

And that drew criticism from several sides.

"The German, British, Swedish and Dutch Governments formed a roadblock to progress on the eurobonds issue," said Poul Nyrup Rasmussen, president of the Party of European Socialists.  ''So blatantly putting national interest before European recovery is short-termist and lacking in leadership."

"It sends one message to the Markets: you can keep picking us off one by one".

But eurobonds were "not on the agenda," Zapatero said, because it was "not the right time for this debate." Instead, he said, "all member states expressed their will to work for fiscal consolidation." 

Déjà vu?

But will member states really want to engage in harmonising tax and labour policies?

Speaking after the summit, Sarkozy admitted that "the thinking has to mature" on how to achieve greater economic convergence in the euro zone.

"There are sovereign countries, this requires persuasion," he said, suggesting the debate is likely to meet resistance from countries such as Ireland which currently apply very low corporate tax rates.

"Good luck," said Daniel Gros, director of the Centre for European Policy Studies. "These are very general, high-sounding resolutions, and I’ve heard them many times in the past. They never lead to anything."

The most obvious challenge: the economic realities facing the 16 countries that use the euro are vastly different. The recession is over in Germany, where employment is back to pre-crisis levels and industrial output grew 3% in October alone. But Greece and Ireland, both recently saved by EU-bailouts, are still mired in recession.

And while Irish prime minister Brian Cowen agreed coordinating economic policies is a good idea, he said ''taxation is a national competence''.

Ireland’s super-low corporate tax rate of 12.5% has drawn fire from France and other countries because it gives Irish businesses a competitive advantage. And that is the kind of gap France and Germany want to close before agreeing to help finance a eurobond market.

"I want more convergence but this is a very widely spread issue because you need to move completely different systems of social or societal integration together," said Werner Hoyer, German European Minister.

"It is a challenge for decades and not just for a summit."