Sarkozy, Merkel to meet on debt crisis, market tensions

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PARIS: France's Nicolas Sarkozy was to 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.

Merkel and Sarkozy lead the 17-nation eurozone's two biggest economies and markets have been watching anxiously to see whether they would agree a plan to boost confidence and tame an unprecedented sovereign debt crisis.

But on the eve of the talks both sides talked down the chances of a breakthrough, and the French and Spanish markets dipped when a German spokesman flatly ruled out talk of issuing a joint eurozone bond.

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.

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 their massive public deficits but would also transfer some of the cost of servicing these debts to German taxpayers.

This would be a complete non-starter for Berlin without a quid pro quo of new rules to enforce tougher fiscal discipline throughout 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.

French stocks into the red before they recovered slightly.

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

French officials said Sarkozy still intended 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."

The ECB began buying bonds issued by eurozone members in a bid to protect weaker members from speculative attacks, stepping up purchases to 22 billion euros last week to bring the total spent to 96 billion euros.

The move helped pushed down Italy and Spain's borrowing costs sharply, taking the immediate pressure off Rome and Madrid as they try to stabilise their strained public finances.

So far, so good but the question now is -- what next?

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

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. (AFP)