Under heavy pressure to restore confidence in the euro zone following a dramatic market slump earlier this month, President Nicolas Sarkozy and Chancellor Angela Merkel vowed to stand shoulder-to-shoulder in defending the single currency.
The two leaders did not back joint euro bonds, seen by many as a solution to the euro zone's debt problems, saying this could only be envisaged as a longer-term option. They also stopped short of increasing the euro zone's EFSF rescue fund, which currently stands at €440 billion.
Their message was that the focus should be on further economic integration rather than signing bailout cheques, an apparent concession to Angela Merkel.
"We have exactly the same position on euro bonds," Sarkozy told a joint news conference with Merkel after their talks. "Euro bonds can be imagined one day, but at the end of the European integration process, not at the beginning," he said.
Merkel and Sarkozy also proposed taxing financial transactions, in a further rap to financial market players whose panic-selling earlier this month wiped some $4 trillion off global stocks and sparked a temporary ban in Europe on short-selling.
The European Commission supported the call, saying "a financial transaction tax will be a key instrument to ensure that the financial sector makes a fairer contribution to public accounts".
It said it intends to make a proposal in this sense "soon", probably in the autumn.
Eurozone governance
In a joint letter to European Council President Herman Van Rompuy, the two leaders said their proposal was for "a real economic government" for the euro zone, with a president elected for two-and-a-half years.
According to Franco-German plans, leaders of the embattled 17-nation bloc would meet twice a year to steer policymaking in the euro zone, a long-standing French demand that had been resisted in Berlin for fear that it would encroach on the independence of the European Central Bank.
The move came as a response to criticism that market confidence in the euro zone had been undermined by a cacophony of differing policymaking voices in recent months.
Julian Callow, senior European economist at Barclays Capital, said that while markets needed to see "more flesh on the bones" of the proposals, it was significant that the two leaders had broken into the August holiday period to meet.
"They are pledging a commitment to economic governance, which is a step forward, and there is also a commitment to a debt brake, although it remains to be seen whether that will be significantly strong," he said.
"Each side is surrendering some sovereignty, which in the end could pave the way to much closer political union and so prepare the ground for the issue of euro bonds."
European Commission President José Manuel Barroso also hailed the move as an important political step. "A regular format and frequency for the euro area summits, with a permanent chair, contributes to a more stable and stronger political leadership," he said in a joint statement with Economics Commissioner Olli Rehn.
Debt break
In a further concession to German demands, Sarkozy said that if adopted, their proposal that eurozone governments should enshrine deficit-limiting rules into their constitutions would be obligatory, not optional.
"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," he said. "Consequently if the rule is to be adopted by the 17, it will not be an optional rule but obligatory."
The move was hailed by Barroso, who described it as "a further strong political commitment to the long-term sustainability of public finances".
The French president has already proposed to enshrine a "golden rule" in France's constitution, a proposal which must still be voted through by the parliament and senate in a "congress" meeting where the socialist opposition said it would block it.
October summit to seal plans
The Franco-German proposals will be evaluated by Van Rompuy, who has been charged with putting together a package on economic coordination for an EU summit in October.
But many experts believe the only way to ensure affordable financing for the bloc's most financially distressed countries would be for the euro area to issue joint euro bonds.
Officials in Paris and Berlin played down expectations ahead of Tuesday's meeting, saying euro bonds would not be on the agenda, but markets were still disappointed.
"Rather than the additional check writing by core European governments that certain markets were looking for, including a new euro bond, they are getting a fiscal discipline golden rule, stronger economic governance, and a new financial transactions tax," said Mohamed el-Erian, co-chief investment officer at Pacific Investment Management Co. in California.
Ordinary Germans have opposed more help for their weaker neighbours even while their economy has been roaring along. Data on Tuesday showing that German GDP barely grew in the second quarter suggests a slowdown is starting to grip, making underwriting of eurozone debt an even harder sell politically.
Sarkozy and Merkel had already planned to meet this week to discuss their proposals on eurozone governance, but the stakes were raised when France was slammed in last week's market rout.
Investors dumped shares in French banks, which are exposed to Italian debt, as rumours circulated – denied by rating agencies – that France's AAA-rating could be at risk.
That sell-off was evidence markets were not convinced by a 21 July deal to give new powers to the euro zone's EFSF rescue fund and for proposals to be made on closer economic governance.
Some still saw Tuesday's ideas as a boost for the euro.
"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.
EurActiv with Reuters
