The leaders of France and Germany last night set out a vision of an "economic government for the eurozone" as they vowed to defend the single currency and put an end to the sovereign debt crisis that has plagued the bloc.
The French President Nicolas Sarkozy and the German Chancellor Angela Merkel, said more economicintegration of the eurozone's members was the only way to restore confidence in the euro following the bail-outs of debt-ridden countries such as Greece and Portugal – and the mounting speculation that Italy and Spain may have to be rescued too.
Mr Sarkozy said: "This economic government will be made up of heads of state and government that will meet twice a year, and more if necessary – it will elect a stable president for two-and-a-half years."
Herman Van Rompuy, the current President of the European Commission would be the first such leader, the French President added.
The powers of the new authority have yet to befinalised under the French and German proposals, though both leaders said it would be necessary for members of the eurozone to pledge to live within strict borrowing limits and to promise to take action were the new economic council to rule their budgets fell foul of this golden rule. France and Germany also hope to set a common eurozone tax rate for companies.
"Our proposals are designed to win and secure the trust of the markets with action," Ms Merkel said. "Germany and France feel absolutely obliged to strengthen the euro as our common currency and further develop it and it is entirely clear that for this to happen, we need a stronger interplay of financial and economic policy."
The initiative is a direct response to those critics of European leaders who have warned that the eurozone would never be able to put the debt crisisbehind it without political reforms. The sovereign debt crisis blew up in the wake of the financial crisis after members of the single currency ignored rules designed to ensure all countries kept their debts within agreed limits. When lenders began to question some countries' ability to repay that borrowing, the stronger nations in the eurozone were obliged to step in.
Both leaders said yesterday that it was too early to introduce eurobonds to replace the bonds issued by each individual member of the eurozone. There have been widespread calls for such instruments in rcent days, because taken collectively, the debts of theeurozone remain manageable, but the idea is hugely unpopular in countries such as Germany, where people say they are being asked to pick up the tab for more profligate nations.
"I think what we are proposing here is the means with which we can solve the crisis right now and win back trust, step by step," Ms Merkel said. "I do not think eurobonds will help us in this." Mr Sarkozy added: "Eurobonds can be imagined one day but at the end of the European integration process, not at the beginning."
The omission of eurobonds from the proposals appeared to disappoint the markets, with US stocks falling in early trading last night and the value of US Treasury Bonds, a safe haven asset, rising sharply.
In a move that may alarm the banking industry, the two leaders also made it clear yesterday they were determined to press for a European-wide tax on financial transactions.