NEWS

Sarkozy, Merkel to discuss eurozone crisis on Tuesday

French President Nicolas Sarkozy and German Chancellor Angela Merkel will discuss next Tuesday how to make the euro zone work more effectively amid persistent doubts in financial markets over Europe’s ability to solve its sovereign debt crisis.

Paris announced the meeting on Thursday after French bank shares were hammered this week in a global market rout that suggested investors have lost confidence in the ability of governments on both sides of the Atlantic to rein in their debt.

After a series of bailouts of debtor states that have failed to restore calm, the two leaders are likely to discuss the need for regular euro zone summits to co-ordinate economic policy and may explore more divisive ideas such as expanding the bloc’s rescue fund or issuing euro bonds.

Sarkozy’s office said the two leaders would meet in Paris at 1400 GMT and hold a news conference and a working dinner.

The French leader said after a July 21 emergency summit of euro zone leaders that Paris and Berlin would put forward joint proposals in August on improving euro zone governance.

That summit, which agreed in principle on a second bailout for Greece and measures to halt contagion to larger economies, failed to calm market jitters, forcing the European Central Bank to decide on Sunday to buy Italian and Spanish bonds.

Sarkozy held emergency talks with top ministers on Wednesday after France was hard hit by market turbulence that has wiped some $4 trillion off the value of global stocks this month.

With markets losing faith in the solidity of the euro zone, there have been calls for the bloc’s EFSF bailout fund to be increased from its capacity of 440 billion euros, although Berlin and Paris are both reluctant to support such a move.

The executive European Commission is due to put forward ideas for a possible common euro zone bond in October, although the principle of joint debt issuance or guarantees remains anathema in Germany, which opposes any «transfer union» whereby wealthier euro zone countries would support weaker ones.

Some believe Germany may have no choice over the long term.

“Right now this is very difficult to swallow for German politicians. But if you look at the history over the last, let’s say 15-18 months, there were so many things German politicians say they would never do and they did it,» German economist Peter Bofinger told Reuters Insider TV.

“I think within the next 12 months, we will have something like euro bonds. Whether it has a name or not doesn’t matter. But we need this common mechanism because otherwise the risks of breaking up the Euro area are too huge.”

Bofinger is a member of the Berlin government’s panel of economic advisers but is more pro-European than his peers.

Other ideas mentioned by EU diplomats include holding regular summits of euro zone leaders to co-ordinate economic and fiscal policy, with European Council President Herman Van Rompuy playing a role as co-ordinator and single voice of the euro.

Rumours about the safety of France’s AAA credit rating, an expanded Greek bailout that would hurt French banks and talk that Societe Generale could be in trouble sent shares of France’s second-largest bank into a nosedive on Wednesday in the heaviest volume since the 2008 financial crisis.

SocGen denied the rumours and its shares firmed on Thursday, desite some yo-yoing, after the Bank of France insisted French banks were solid and France’s AMF stock market regulator said publishing unfounded information was liable to be sanctioned.

On Wednesday, Sarkozy, intent on defending France’s cherished Triple-A credit rating in the wake of the US downgrade, ordered his finance and budget ministers to come up with new ways to prune France’s public deficit.

French journalist Arnaud Leparmentier of Le Monde newspaper wrote in a blog that beyond a meeting with Merkel, Sarkozy told ministers he also hoped to see Chinese leaders in Beijing later in August. He also hopes to see US President Barack Obama at a UN general assembly in late September.

Merkel faces strong domestic opposition to more euro zone bailouts, although she is expected to win parliamentary backing next month for the July 21 agreement to widen the scope of the EFSF to buy sovereign bonds in the secondary market and give precautionary credit lines to member states in difficulty.

A Harris Interactive opinion poll published on Thursday found that 79 per cent of French people are worried about the effects of the current global financial situation on France and 67 per cent worried about the impact to their own situation.

The survey also found the French had more confidance in Merkel than in Sarkozy to prevent a new global financial crisis. [Reuters]