Sarkozy and Merkel in euro crisis talks
French and German leaders to discuss ways to contain the debt crisis which some say threatens future of single currency.
Last Modified: 16 Aug 2011 17:48
Some analysts predict a eurozone collapse without radical measures to rescue the currency union [Reuters]

The leaders of France and Germany, the eurozone's two biggest economies, are set to meet in Paris to discuss the debt crisis that is threatening the future of the currency union.

French President Nicolas Sarkozy and German Chancellor Angela Merkel are expected to discuss what further measures they can take to contain the crisis, which is now spreading to the continent's core, amid concerns about the state of the Italian economy and rumours that France could be at risk of losing its AAA credit rating.

Germany's economy, considered the strongest in the eurozone, is also under pressure with economic data released on Tuesday revealing a sharp slowdown in growth to just 0.1 per cent in the second quarter of 2011.

The eurozone as a whole posted meagre 0.2 per cent growth in the second quarter.

"The German data are certainly disappointing," said Juergen Michels, chief euro-area economist at Citigroup in London. "Everything is pointing toward stagnation in the euro area."

'Eurobonds' call

Many experts say the only way to ensure affordable financing for the 17-nation bloc's most financially distressed countries would be for the eurozone area to issue joint eurobonds.

Al Jazeera's Tim Friend's report on debate over eurobonds

But officials in Paris and Berlin said Tuesday's talks would not address that possibility.

Although the German government has long opposed the idea, support is beginning to emerge. The country's export association said on Monday that all other means of fighting the crisis had run out.

"The principle behind a common government bond is that the eurozone countries would guarantee each other's debts, investors would see the bonds as safe and would loan money at low interest rates," said Al Jazeera's Tim Friend.

"The hope is that the lower borrowing costs will prevent any more financial bailouts," he added.

Giulio Tremonti, Italy's economy minister, said on Saturday, that eurobonds would be the best solution to Europe's debt crisis. Some economists say that the eurozone will inevitably come around to accepting the idea.

Jacques Delpla, a French economist who co-authored a paper proposing how eurobonds could work, said the eurozone faced collapse unless leaders went beyond an agreement reached at a July 21 emergency summit on the debt crisis.

"If we just stick to the July 21 agreement then, before the end of the year, there will be no eurozone, unless the European Central Bank (ECB) buys everything that's problematic."

Sarkozy and Merkel are expected to focus on proposals to improve the eurozone's economic governance, which they are committed to issue by the end of August.

In particular, they could discuss holding regular eurozone summits, as France has long sought, or ways of improving peer monitoring of fiscal policies.

Jane Foley, Senior Strategist Rabo Bank International, told Al Jazeera that,"It's unlikely that we are going to see a significant push-on, politically, just from this one meeting.

So it's probably that they are just going to ratify really the agreements already made on July 21 which related to the bailouts by EFSF."

Brief respite

At the July summit, eurozone leaders agreed to a second bailout package for Greece. They also agreed to give their European Financial Stability Facility (EFSF) rescue fund broader powers.

But the moves provided only a brief respite in the debt crisis.

Frederic Bonnevay, economist at French think-tank Institut Montaigne, said more radical measures were needed even if they did not include eurobonds for now.

"The size and powers of the EFSF need to be expanded dramatically - that's a secret to no-one," he said, suggesting that its firepower should be raised to as much as €1trillion from €440bn currently.

Sarkozy, who broke off his summer holiday last week to deal with the market meltdown in French stocks, is to meet with Francois Fillon, French prime minister, over lunch to fine tune France's position before he meets Merkel.

Olivier Bailly, european commission spokesman, said on Tuesday that talks later in the day between the leaders of France and Germany were a "very positive" development for the eurozone.

But Al Jazeera's Jacky Rowland, reported from Paris, "What we are primarily expecting to see is symbolism and announcements really underlining the joint commitment of these two countries at the very heart of Europe
to maintaining the European Union and the single currency."

Al Jazeera and agencies
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