Merkel, Sarkozy propose Eurozone gov't

The leaders of France and Germany are pushing all 17 nations that use the euro to enshrine balanced budgets in their constitutions and want greater collective governance of the Eurozone.

French President Nicolas Sarkozy says he and German Chancellor Angela Merkel want a "true European economic government" that would consist of the heads of state and government of all Eurozone nations.

The new body would meet twice a year and be led by European Union (EU) President Herman Van Rompuy.

Sarkozy and Merkel presented their proposals after meeting Tuesday in Paris amid signs of economic slowdown and after an exceptionally turbulent week on financial markets, prompted by concern about Europe's financial health.

The meeting between Angela Merkel and Nicolas Sarkozy in Paris comes after a week of huge turbulence in financial markets, largely blamed on Europe's sprawling government debts and worries that European leaders aren't doing enough to address them.

Economic growth in the 17 countries that use the euro sagged to a lacklustre quarterly rate of 0.2 per cent in the second quarter, as a previously robust expansion in Germany and France almost ground to a halt, according to figures from Eurostat, the EU's statistics office.

Europe's sagging growth prospects complicate the debt crisis, because slower growth makes it even harder for governments to shrink debt. Less growth in Germany and France - the two economic heavyweights of the Eurozone - makes it harder for those countries to serve as creditors and back increased bailouts, while a slower economy also shrinks potential export markets for countries, like Greece, mired in recession.

"The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy," said Lloyd Barton, senior economic advisor to Ernst & Young. "A further deterioration in financial conditions could severely damage the outlook for the whole of the Eurozone."

The downbeat growth news weighed on markets, and provided yet more evidence that the global economy is slowing down sharply, following disappointing second-quarter growth figures from the United States (US).

Financial markets have been hugely volatile of late, partly over fears that Italy and Spain, the Eurozone's third and fourth largest economies, may find it too expensive to service their debts. Those concerns triggered last week's intervention in the bond markets from the ECB, which has increasingly stepped in as Europe scrambles.

France and Germany, which together account for almost half of the Eurozone's economic output, are taking the lead in pushing for reforms. But, speculation that the two leaders would consider proposals for the Eurozone to issue jointly guaranteed government debt appear to have been dashed, with officials for both sides indicating that would not be on the agenda.

Germany has remained firm in its stance that other EU countries must exert more fiscal discipline.

The hallmark of the debt crisis has been soaring yields, or interest rates, on the bonds of struggling countries, as worried investors have demanded more and more to lend to them.

Higher yields, at a minimum, make it difficult for countries to climb out of a cycle of debt since they compound the amount owed. Sometimes yields soar so high that they effectively bar countries from borrowing in the markets, as has happened with Greece.

Some observers have suggested that eurobonds are a solution to the crisis since they would be backed by the Eurozone as a whole and would thus paper over the disparities among countries in the monetary union.

France was caught in the market crossfire last week, with investors worrying about the financial health of the country's banks in particular and whether it would be the next country after the US to lose its triple-A credit rating.

- AP