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Merkel-Sarkozy Meeting Disappoints Europe Markets

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A much-touted meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy over strategies to cope with the euro zone’s debt woes disappointed investors Tuesday, and stocks echoed their disappointment in Wednesday morning trading, moving lower.

While the two leaders discussed plans to defend the euro and spoke of a future fiscal union, they failed to push for an increase in the euro zone’s rescue fund and did not discuss euro bonds. That last did not satisfy investors, who took out their frustrations on the market. From Asia to Europe markets were lower, despite calls for a “golden rule” to be woven into euro zone nations’ constitutions that would obligate them to work toward balanced budgets and debt reduction.

The New York Times reported that both leaders dismissed the idea of a common euro bond, upsetting bond traders concerned about investments in debt already on the market. The two also opposed increasing the rescue fund, already regarded as insufficient in size to cope with debt problems in Spain and Italy; as it is, the new rescue fund will not be implemented at the earliest until late September.

Instead, Merkel said there was “no magic wand” to solve the euro’s problems, and repeated the mantra of improved fiscal discipline, competitiveness and economic growth among weaker states.

The two did propose a financial transaction tax to be put in place by 2013 by both their countries, although it is doubtful that such a tax will be implemented in other euro zone nations. In addition, Britain is expected to continue to resist such a tax, and Ireland is expected to insist, according to a Reuters report, that the tax be required of the entire European Union (EU) rather than just the euro zone.

Finance Minister Michael Noonan was quoted in the report saying, “We can’t have a situation where there is a transaction tax in Dublin and there is no transaction tax in London.” Saying such a proposal had already been proposed and rejected last month at a meeting of European leaders, he continued, “There would be a lot of objections to it from countries with strong financial services industry participation—Luxembourg, Netherlands, even Paris. One of the key things we need to watch is that if some kind of transaction tax comes in that it would apply to the whole 27 rather than the 17 euro zone countries.”


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