Merkel and Sarkozy offer no miracle cure for euro (Reuters)

BERLIN (Reuters) – New Franco-German proposals to boost fiscal convergence in the euro zone got a cool response from other member states on Wednesday and failed to convince investors the bloc's debt crisis was closer to being solved.

Traditional German ally Austria criticised plans announced by Chancellor Angela Merkel and French President Nicolas Sarkozy on Tuesday to move toward an "economic government" in which euro states agree to give up sovereignty over economic policy.

And Ireland reacted skeptically to a pledge by Berlin and Paris to press ahead with a harmonization of their corporate tax rates in hopes that other euro members would follow suit.

A separate proposal, to write German-style "debt brake" rules into national constitutions across the 17-nation currency bloc by mid-2012, faces big hurdles given that Sarkozy himself is struggling to secure a parliamentary majority for such a plan at home.

Finland's finance minister questioned whether such a rule would work at all and said she was "not too excited" about making changes to her country's constitution.

Before the meeting some investors had held out hope that the leaders of the bloc's two biggest economies would take bolder steps, such as agreeing to joint euro zone bond issues or boosting the size of their rescue fund.

But both governments had made clear in the run-up to the Paris summit that neither of these steps was under serious consideration.

By avoiding bold short-term solutions, Merkel and Sarkozy left responsibility for warding off any new market attacks to the European Central Bank (ECB), which has bought up tens of billions of euros in bonds from weakened debtors like Italy and Spain to prevent the zone from breaking apart.

"I think the crisis in fact is likely to get worse before it gets better despite the announcements that we had yesterday," Jacques Cailloux, chief European economist at RBS, told Reuters Insider television.

"The ECB is trapped here," Cailloux said. "So I think we could end up having 150 billion euros to 200 billion euros ($215 billion to $290 billion) of Spanish and Italian bonds on the ECB balance sheet in the next month and a half."

Euro zone leaders agreed a month ago to give their rescue mechanism the power to buy bonds, but that decision must be approved by national parliaments before it can take effect.

TOO LITTLE TOO LATE

Some of the steps unveiled at the news conference in Paris on Tuesday would have seemed almost revolutionary as recently as a year ago.

Merkel bowed to longstanding French calls to hold regular meetings of euro zone leaders and appoint a symbolic president, or spokesman, for the bloc -- steps that are bound to widen the divide between euro "ins" and "outs" in the 27-nation EU.

But in the midst of a crippling crisis that has threatened to engulf big countries like Spain, Italy and France, the announcements were criticised by many as "too little too late."

"There is little in the way of concrete measures in these decisions," said Wolfgang Leoni, chief investment officer at Sal. Oppenheim. "This is exactly what the markets don't want."

The reaction on Wednesday was subdued. The euro edged up against the dollar, pushing above the $1.45 mark for the first time in three weeks.

Spanish and Italian 10-year bond yields hovered near 5 percent, more than a percentage point below where they stood before the ECB first intervened in the markets earlier this month.

But economists said markets could test the resolve of European policymakers again within weeks. Both Spain and Italy held out hope that Merkel and Sarkozy would change their minds and embrace joint euro bonds.

"Markets are looking for a magic bullet and that doesn't exist," said Julian Callow, an economist at Barclays in London. "Instead of a magic bullet we have more of the same. Governments are trying to cut their deficits, that is eating into demand and driving economies weaker."

Data on Tuesday showed the German economy, Europe's biggest and for the past year the most vibrant, barely grew in the second quarter.

CONTENTIOUS DEBATES

One worry is that the Franco-German proposals re-open a number of contentious debates within the EU, further sapping investor confidence.

Merkel and Sarkozy vowed on Tuesday to press ahead with long-stalled plans for a financial transactions tax. But the UK has long opposed this, and moving ahead without the City of London could end up hurting the financial sectors in Frankfurt and Paris.

Irish Finance Minister Michael Noonan said he would insist that any such tax apply to all 27 members of the EU, not just the 17 that share the euro.

Looming elections in key euro zone member states -- Spain votes in November and France in the spring -- could also complicate implementation of the proposals announced by Merkel and Sarkozy.

France's Socialists have strongly opposed the government's plans to introduce a balanced budget rule to the constitution, threatening to turn it into a campaign issue.

On Wednesday Francois Hollande, the leading Socialist candidate to challenge Sarkozy in next year's vote, urged a national debate on the issue.

(Reporting from European bureaus; Editing by Ruth Pitchford)

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Sarkozy and Merkel push tax, deeper economic coordination (Reuters)

PARIS (Reuters) – The leaders of France and Germany, under pressure to calm the euro zone debt crisis, will float proposals in September for a tax on financial transactions and push for stronger joint economic governance, French President Nicolas Sarkozy said on Tuesday.

After talks in Paris, Sarkozy said he and German Chancellor Angela Merkel were also proposing that all 17 euro zone countries commit to balanced finances and write that goal into their constitutional law by summer 2012.

Among other measures announced, he said they would strengthen the bloc's economic government via twice-yearly meetings of leaders and the creation of a presidency with a two-and-a-half-year term to steer this forum.

"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," Sarkozy told a news conference at his Elysee Palace offices, where he was flanked by Merkel.

"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 in the euro zone," Merkel said.

The two are under pressure to come up with plans to shore up the euro zone and restore financial market confidence after a year and a half of turmoil that has refused to die down despite bailouts of Greece, Ireland and Portugal and the creation of an anti-contagion fund.

On the financial transaction tax, Sarkozy said:

"The French and German finance ministers will table a joint proposal at the EU level next September for a tax on financial transactions. This is a priority for us."

Financial markets were closely watching the two leaders' second bilateral meeting in just over three weeks for any signal of bold steps to restore confidence, and above all any signal they might commit to issuing pan-European government bonds, a move that could make debt more affordable for troubled economies.

In the event that "last resort" of joint bond issuance, as Merkel called it, did not appear to be part of the Paris accord.

"What we are proposing here is the means with which we can solve the crisis right now and win back trust, step by step ... I do not think euro bonds will help us in this," Merkel said.

Sarkozy nevertheless sought to show the two leaders saw eye to eye on the matter.

"We have exactly the same position on euro bonds ... Euro bonds can be imagined one day, but at the end of the European integration process not at the beginning," he said.

(Reporting by Paris and Berlin reporters; Writing by Brian Love, editing by Mike Peacock and Ruth Pitchford)

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Man grabs French leader Sarkozy, is detained (AP)

PARIS – A man in a crowd grabbed French President Nicolas Sarkozy by the shoulder Thursday and nearly knocked him to the ground before being tackled by security officers and detained.

The unusually aggressive incident occurred as the president shook hands with a crowd in the town of Brax in southwest France.

The man was not armed, according to the national police service. An official with the service said the 32-year-old Frenchman lives in the Lot-et-Garonne region and works in the theater business. The official was not authorized to be publicly named due to police policy.

The man was detained and being questioned in the nearby town of Agen.

Images broadcast on French television showed Sarkozy reaching over a metal barricade to greet onlookers when an arm grabs his suit roughly by the shoulder and pulls it toward the crowd.

Sarkozy started to lose his balance and fall, then immediately recoiled and righted himself. Security officers pulled the assailant to the ground.

Sarkozy's office would not immediately comment on the incident.

Sarkozy is an outspoken and divisive figure whose poll ratings have been quite low for months. He is expected to run for re-election next year, and his presidential visits to the French provinces in recent weeks have the air of campaign stops.

He occasionally gets heckled by critics, though only verbally. In one 2008 incident, a man was caught on video telling Sarkozy not to touch him as the president walked through a crowd. The man accused Sarkozy of "dirtying me," and Sarkozy snapped back with an insult that mildly translated as "get out of here, you total jerk."

Sarkozy's predecessor, Jacques Chirac, was the object of an assassination attempt in 2002, during a military parade for the Bastille Day national holiday. A far-right activist, Maxime Brunerie, was convicted of attempted murder after he pulled a rifle from a guitar case and shot at Chirac. Chirac was unhurt.

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