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Markets Unimpressed by France-Germany Euro Plans


French President Nicolas Sarkozy, second from left, and German Chancellor Angela Merkel, second from right, attend a meeting to discuss how to deal with Europe's sovereign debt crisis, at the Elysee Palace, Paris, August 16, 2011

French President Nicolas Sarkozy, second from left, and German Chancellor Angela Merkel, second from right, attend a meeting to discuss how to deal with Europe's sovereign debt crisis, at the Elysee Palace, Paris, August 16, 2011

The European Commission supports the proposals made by France and Germany on Tuesday to shore up the eurozone, its spokesperson said Wednesday. The markets, however, have not reacted so favorably.

Olivier Bailly, the EU spokesperson, said the commission supports the objectives put forward by French President Nicolas Sarkozy and German Chancellor Angela Merkel on Tuesday.

"We already mentioned the need to strengthen the economic part of the economic and monetary union," Bailly said. "What is happening now since the beginning of the crisis, and what has been announced yesterday as a proposal by France and Germany, go exactly in this direction.”

Watch a related report by Mil Arcega

Sarkozy and Merkel held emergency talks Tuesday to discuss Europe’s sovereign debt crisis.

Following the talks, they said closer economic integration in Europe is needed. Sarkozy called for a “new economic government” that would be formed of the 17 eurozone government leaders. He said it should meet twice yearly and be led by European President Herman Van Rompuy.

France and Germany also called for constitutional amendments across the eurozone that would require governments to balance their budgets.

The leaders backed away from the idea of issuing “eurobonds” - bonds that would be issued by the eurozone as a whole rather than by individual countries. Some analysts, investors, and European politicians think eurobonds would be the best way to restore faith in European debt and calm volatile markets.

Bailly said Wednesday that eurobonds are an interesting idea but are not on the agenda right now.

"We don't think that this is a solution for today's problem and we don't think that there is a political consensus within Europe to move forward today with this idea," said Bailly.

Overall the market reaction to the new plans was not positive, with shares falling early in the trading day Wednesday, followed by a slight recovery.

Dominique Dequidt, an Asset Manager at KBL Richelieu in France, said the market reaction is uncertain because the decisions made Tuesday were not as bold as the markets were expecting.

France and Germany said they don’t want to increase the size of the European Union’s rescue fund, which is worth hundreds of billions of dollars. Some investors say it needs to value at least $2 trillion to be effective.

Iain Begg, a European economics expert with the London-based research group Chatham House, said Sarkozy and Merkel haven’t put “enough meat on the bones” of their proposal. He said that’s important because economic integration in Europe is vital.

When VOA asked him why, he replied, "Well, because it enables a much stronger defensive bulwark to be created to oppose the market's pressures, which have been so devastating over the last 18 months. And it's also the sort of structure that is going to be more enduring in exactly the same way as in the U.S., where having a single treasury bond is a very significant source of strength for the American economy."

But Begg said the process of integration is inevitably slow, not least because it often lacks popular support. He said, for example, that when it comes to doling out money, the population of Europe’s largest economy is hesitant.

"In Germany, for example, there is clearly strong opposition to the idea of their tax base somehow being responsible for the debts of other countries," he said. "In other countries you might find support for integration across something like the military sphere, and still they will look for closer integration on social issues. So you have to look at it dossier by dossier to find out what populations are really in favor of or opposed to."

Merkel and Sarkozy put forward a plan Tuesday for a Europe-wide tax on financial transactions.

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