Markets drop after Merkel-Sarkozy meeting

Leaders’ plans for eurozone fail to reassure investors as EU welcomes proposals for economic governance.

Falls on Europe’s financial markets suggest that the leaders of France and Germany failed to convince investors that they have done enough to prevent a further spread of the eurozone’s sovereign-debt crisis.

Nicolas Sarkozy and Angela Merkel, who met in Paris yesterday (16 August), proposed closer fiscal co-operation between eurozone member states and the introduction of a financial transaction tax, but did not make specific suggestions to tackle immediate problems.

Market analysts say that the lack of short-term measures, such as the enlargement of the eurozone’s bail-out fund, as well as fear of the proposed financial transaction tax, have disappointed investors.

Shares fell in morning trading, with Germany’s Dax losing 1.7% and the FTSE 100 in London and the Cac 40 in Paris both falling by about 1%. Shares in Deutsche Börse and the London Stock Exchange Group (LSE) lost at least 3% over fears of the financial transaction tax.

EU reaction

The outcome of last night’s summit between the two leaders was welcomed by Olli Rehn, the European commissioner for economic and monetary affairs, and José Manuel Barroso, the president of the European Commission, who issued a joint statement.

They said that the proposals put forward by Merkel and Sarkozy represented a “step forward in our common efforts to strengthen the governance of the euro area”.

They said that they were in favour of the two leaders’ proposal to set up regular meetings of leaders of eurozone member states. “The challenges we are facing have made even clearer that a shared currency implies shared responsibility and demands closer coordination of economic policies,” they said. “A regular format and frequency for the euro area summits, with a permanent chair, contributes to a more stable and stronger political leadership.”

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They said that the European Commission would follow Merkel’s and Sarkozy’s proposal for a financial transaction tax by making their own recommendations “soon”. The Commission proposed such a tax in 2010, but the idea was rejected by member states at the time.

Barroso and Rehn said that the Franco-German call to enshrine the principle of a debt brake in national constitutions was “a further strong political commitment to the long-term sustainability of public finances”.

However, in addition to the markets, some politicians have also reacted coolly to the proposals. Maria Fekter, Austria’s finance minister, told Austrian state television: “I can’t imagine economic or taxation policies being exclusively made for us in Brussels.” She said that that such an agreement was still “very far off”.

The European Commission said today that it expected Merkel and Sarkozy to send a letter documenting more details about their proposals.