Merkel and Sarkozy reveal 'eurozone government' plan

After talks in Paris, German chancellor Angela Merkel and French president Nicolas Sarkozy said the 17 euro nations should be compelled by the centre to stick to a "golden rule" limiting deficits, starting from the summer of next year.

A "true European economic government" would co-ordinate fiscal policy across the continent, they said, with the aim of giving investors confidence that no one nation could be allowed to build up debt bubbles such as those seen in Greece.

They said they would soon propose a new EU-wide tax on financial transactions, and will also begin work on a new Franco-German corporate tax regime.

But Ms Merkel once again rejected a full fiscal union, scotching plans to issue "eurobonds" on behalf of the entire continent, as recommended last week by Italy.

She faces increasing pressure in Germany not to bail out the indebted nations of the south, which heightened yesterday with news that the country's economic growth had slowed to a virtual standstill.

US markets fell yesterday as the pair spoke but the European markets will give their own verdict today, amid doubts over what short-term difference the proposals will make.

It comes amid flatlining confidence in the markets in the ability of the eurozone nations in the south to stand by their debts. Last week, even France was having to deny rumours that its credit rating would be downgraded because of its own debt burden.

Under the Merkel-Sarkozy plan, the new eurozone "government" will consist of the heads of government of all the eurozone nations meeting two or three times a year, or more frequently at times of crisis.

The European Union president, Herman van Rompuy, will chair the body. It will enshrine a more collective approach to governance of the region, giving the collective group far more oversight of individual decisions being made by nations to prevent them bingeing on cheap debt again.

"There has to be a stronger co-ordination of financial and economic policy" to protect the euro, Ms Merkel said.

She added: "We will regain the lost confidence. That is why we go into a phase with a new quality of co-operation within the eurozone."

Mr Sarkozy said: "We want to express our absolute will to defend the euro and assume Germany and France's particular responsibilities in Europe and to have on all of these subjects a complete unity of views."

He also said that France and Germany would kick off the process of greater integration by beginning work to merge their corporate taxes from 2013 onwards. The pair also said they would propose an EU-wide tax on financial transactions, to be outlined next month.However, the short-term crisis afflicting debt-burdened nations such as Greece, Italy, Portugal and Spain was highlighted by the head of the World Bank yesterday, who called on them to do more to face up to their unsustainable debts.

Robert Zoellick said the nations "have not really gotten ahead of the problem".

He added: "I'm trying in a way that I can to start to condition both the political leadership and the general public - you've got to do more than you're doing and you have to move more actively."

He also said the decision by the European Central Bank to buy €22 billion (19bn) of Italian and Spanish bonds last week was a short-term move and did not change the underlying problem of high debt levels.