In a show of unity amid growing doubts about the capacity of the French-German couple to steer the Union, the two leaders tabled a number of proposals ahead of the 17 June EU summit.
Dropping his earlier insistence that there should be a formal institution to steer the economic governance of the euro zone, Sarkozy accepted Merkel's suggestion that regular EU summits should play that role.
In response, Merkel accepted that in case of emergency, there would be informal ad hoc meetings of eurozone members.
The two leaders also agreed that governments who breach the Union's budgetary discipline should have their voting rights suspended.
Sarkozy, who until now had not favoured punitive measures, said that it was not clear if there was a need to change the EU treaty for that purpose.
"If a treaty change is needed we will propose it," he said.
Merkel and Sarkozy also said they will request that G20 leaders back a tax on banks for all international financial transactions at a summit in Toronto on 26-27 June.
Canada led opposition to the introduction of such a tax when finance ministers from the Group of 20 economic powers met in South Korea earlier this month, but Sarkozy and Merkel made clear they were not prepared to drop the idea.
Merkel said she and Sarkozy would be writing to Canadian Prime Minister Stephen Harper to inform him of what the "conditions" would be for holding the meeting.
Spain denies EU rescue bid
In the meantime, Spain admitted that the European financial crisis is taking a toll on the country's banks, with foreign banks refusing to lend to some.
Spanish Treasury Secretary Carlos Ocana admitted officially for the first time that some Spanish banks faced a liquidity freeze in the interbank market and said the government was working to restore confidence.
Merkel was asked about media reports that Madrid could seek aid from the new 750 billion euro European Financial Stability Facility as early as this week (EurActiv 10/05/10).
"If there should be problems - and we shouldn't talk them up - the mechanism can be activated at any time," Merkel said. "Spain and any other country knows that they can make use of this mechanism if necessary."
The German Finance Ministry and the European Commission denied a report in the Frankfurter Allgemeine Zeitung that EU states would hold talks on aiding Spain in Brussels this week.
(EurActiv with Reuters.)
