–Adds Details From Press Conference On Common Proposals

PARIS (MNI) – In order to defend the euro and regain the confidence
of investors, Germany and France unveiled a series of proposals Tuesday
to speed the convergence of their two economies and reduce the deficits
of all Eurozone members.

However, Chancellor Angela Merkel and French President Nicolas
Sarkozy stopped short of calling for a larger Eurozone rescue fund or
pooling their debt issuance — measures many observers argue are
necessary to overcome the sovereign debt crisis.

Until the proposed measures take effect in the coming years,
peripheral Eurozone countries under pressure from the markets will have
to rely on the intervention of the European Central Bank to hold down
borrowing costs.

France and Germany are committed to “to strengthen our common
currency and develop it further,” Merkel told journalists here. “For
this to happen, we need a stronger interlocking of our economic and
financial policies.”

“The euro is our future, it is the basis of our wealth and
contributes to our living together in peace,” she said.

On the basis of a “common analysis and a common vision of the
future,” these “ambitious joint proposals” demonstrate an “absolute
determination to defend the euro” and create “a veritable economic
government for the Eurozone,” Sarkozy explained.

The two leaders proposed that all Eurozone heads of state meet at
least twice a year under a president elected for 2.5 years. For this
position, they proposed the current president of the European Union’s
Council of leaders, Herman Van Rompuy.

In the preparation of their annual budgets, EMU members would have
to agree on a common economic analysis and remedy any shortfalls brought
to light by the European Commission. EU structural aid to individual
members must be more focused on enhancing growth and competitiveness,
Merkel underscored.

A tax on financial transactions for the EU will be formally
proposed in September, they said.

In order to go beyond the EU’s existing fiscal Stability Pact, with
its deficit ceiling of 3% of GDP, the two leaders demanded that all
Eurozone members anchor the objective of balanced public finances in
their constitutions by next summer.

The aim is to ensure that all political players of a country — not
merely the government in place — commit to reducing deficits to zero,
Merkel explained.

While Germany has already adopted such a “debt brake” and is
advancing rapidly toward a zero deficit, Sarkozy’s ruling majority is
not large enough to adopt a constitutional “golden rule” amendment on
its own. He noted that some members of opposition might help out, in
which case the two houses of parliament would be convened in autumn.

To set “an example for convergence” for the rest of the Eurozone,
France and Germany will coordinate the preparation of their respective
government budgets and seek a common base for corporate taxation,
Sarkozy said. “Our responsibility is to move closer together.”

By taking the lead in enhancing coordination and convergence within
the Eurozone, its two largest countries hope to circumvent the
complexity of a formal revision of the Lisbon Treaty — the constitution
of the EU, the leaders explained.

It is too early today to pool debt issuance of EMU members in
so-called eurobonds, which could come “one day” when the foundations for
common guarantees are established, Sarkozy said.

Merkel stressed that countries themselves must remain responsible
for their debts and warned that creating eurobonds might weaken the
credit standings of the principle guarantee governments.

“I feel that people are looking for the one event, the one tool
which will solve everything and pull us out of the crisis,” she said.
Instead, Europe needs to regain trust “step-by-step” as proposed by the
two leaders rather than hope for a magic solution.

The chancellor and the president also rebuffed calls for a massive
expansion of the EMU rescue fund, arguing that with nearly E500 billion
in assets it has the capacity to counter market speculation, provided
governments pursue deficit reduction.

“We must work to regain and secure trust of markets,” Merkel said.
“This will not happen with one bang.”

Whether the Eurozone will emerge stronger as result of the
Franco-German proposals, the two countries themselves are clearly
seeking to overcome their political differences and present a common
front in the face of the markets.

Given Germany’s reticence toward measures that could jeopardize its
credit rating or burden its taxpayers, France has had to water down its
traditionally ambitious vision for a more federal economic zone and
accept rather symbolic measures for the moment.

–Paris newsroom +331 4271 5540; email: ssandelius@marketnews.com

[TOPICS: M$X$$$,MGX$$$,M$$CR$,MFX$$$,MGX$$$,M$F$$$,M$G$$$,MT$$$$]