|Sarkozy and Merkel have held talks to prepare a joint Franco-German position for next week's EU summit [Reuters]
Germany and France have pledged to more closely align their tax and labour policies in order to foster convergence in the eurozone, but rejected calls for an increase in the bloc's rescue fund and a joint eurozone bond.
Earlier on Friday, officials from the European Central Bank (ECB) had told eurozone governments they could not count on the bank alone to solve a debt crisis which has forced bailouts of Greece and Ireland, and heaped pressure on countries like Portugal and Spain.
At a news conference in the southwestern German city of Freiburg, Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, presented a united front ahead of a crucial summit next week, where EU leaders are expected to agree the terms of a permanent rescue mechanism for the bloc.
Berlin has opposed calls by Spain and other countries to move towards a full-fledged "fiscal union" in the 16-nation bloc but appeared on Friday to have agreed to a limited form of policy co-ordination in areas such as tax, although little detail was offered.
"We have agreed to the convergence of German and French tax policies and I thank the German chancellor for this opening," Sarkozy said.
Limited 'fiscal union'
Merkel said it was up to Germany and France to set an example on questions of competitiveness, showing partners how far the bloc's biggest economies could co-operate in areas "beyond pure budget policy".
"We are talking about labour law, about tax law and if we are to improve the coherence of the economic aspects of the eurozone, then we should target these issues step by step and propose solutions," Merkel said.
The two leaders said they would present "structural" proposals next year in the area of economic co-ordination, but declined to elaborate.
"We will defend the euro, because the euro is Europe," Sarkozy said. "Our determination, both German and French, is total."
Pressure on high-deficit euro members eased slightly over the past week after the ECB bought government bonds, pushing down the borrowing costs of countries on Europe's southern periphery.
But the ECB said its responsibility was to ensure price stability, while dealing with the crisis was ultimately up to the eurozone governments.
"We expect all other authorities to be up to their responsibilities," Jean-Claude Trichet, the ECB president, told a news conference in Madrid on Friday.
Mario Draghi, the governor of the Bank of Italy and member of the ECB governing council, told the Financial Times that the ECB could go only so far in helping weaker members by buying their bonds.
"I'm only too aware that we could easily cross the line and lose everything we have, lose independence, and basically violate the [EU] treaty," Draghi, a leading candidate to replace Trichet, said.
The euro, which fell to a 10-week low under $1.30 late last month as the euro crisis deepened, edged higher in the wake of Trichet's comments to trade at $1.32.
Next week's EU summit is expected to finalise plans to introduce a permanent rescue mechanism for the eurozone to replace the $993m European Financial Stability Facility (EFSF) that it set up in May after bailing out Greece.
Yves Mersch, another ECB governing council member, said expanding the stability fund would be preferable to issuing euro area bonds in the short term to tackle any debt problems.
But Merkel rejected calls to increase the EFSF.
"I'd say for us in Germany that the question of expanding the rescue mechanism is not now on the table," Merkel said.
"Less than 10 per cent of the rescue mechanism has been used for Ireland. It is not on the agenda."
Sarkozy also supported Merkel by coming out against a proposal pushed by Jean-Claude Juncker, the Eurogroup president and Giulio Tremonti, the Italian finance minister, for so-called E-bonds, or joint eurozone sovereign debt issues.
"I don't think we were consulted before this idea was proposed, so it shouldn't insult anyone if we say we are not in agreement with it," Sarkozy said, suggesting neither German nor French citizens could accept "mutualising" eurozone debt.