Merkel, Sarkozy meet as euro economy fears swell

[August 16, 2011]  PARIS (AP) -- A marked slowdown in European economic growth is overshadowing a meeting Tuesday between the leaders of Germany and France aimed at getting the eurozone's 17 countries to work closer together to dig Europe out of its debt crisis.

The meeting between Angela Merkel and Nicolas Sarkozy in Paris comes after a week of turmoil in financial markets, largely blamed on Europe's sprawling government debts and worries that European leaders aren't doing enough to address them. It also comes a day after the European Central Bank revealed that it splashed out more money than ever trying to appease the markets.

Europe's sagging growth prospects make it even harder for governments to shrink their debts. Economic growth in the 17 countries that use the euro sagged to a lackluster quarterly rate of 0.2 percent in the second quarter, as a previously robust expansion in Germany almost ground to a halt, according to EU figures Tuesday.

"The longer the sovereign debt market remains stressed, the greater will be the damage to the wider economy," said Lloyd Barton, senior economic advisor to Ernst & Young. "A further deterioration in financial conditions could severely damage the outlook for the whole of the eurozone."

The downbeat growth news weighed on markets, and provided yet more evidence that the global economy is slowing down sharply, following disappointing second-quarter growth figures from the United States.

Financial markets have been hugely volatile of late, partly over fears that Italy and Spain, the eurozone's third and fourth largest economies, may find it too expensive to service their debts. Those concerns triggered last week's intervention in the bond markets from the ECB, which has increasingly stepped in as Europe scrambles.

France and Germany, which together account for almost half of the eurozone's economic output, are taking the lead in pushing for reforms. But, speculation that the two leaders would consider proposals for the eurozone to issue jointly guaranteed government debt appear to have been dashed, with officials for both sides indicating that would not be on the agenda.

Germany has remained firm in its stance that other EU countries must exert more fiscal discipline.

The discussions will center on "measures for better agreement of financial policies," Merkel's spokesman Steffen Seibert said.

Officials for both Merkel and Sarkozy said Monday that jointly guaranteed eurobonds would not be on the agenda.

Analysts forecast that Tuesday's meeting could set the stage for future political decisions about the euro and European integration, but no immediate breakthroughs.

"Don't expect any game-changers from today's meeting," said Neil MacKinnon, global macro strategist at VTB Capital. "The eurozone debt and banking crisis has yet to be properly resolved, and the future viability of monetary union is a choice between moving towards fully fledged fiscal union or considering the possibility of a break-up in monetary union."

European growth prospects are a growing concern too. Until now Germany's economy, Europe's biggest, had been growing strongly despite Europe's government debt crisis.

The eurozone's growth rate was well short of the 0.8 percent recorded in the first quarter, and was largely due to an abrupt slowdown in Germany. Germany's economy has helped support the eurozone through the government debt crisis. Its world-renowned companies have tapped export markets all around the world, particularly in faster-growing emerging countries.

The chief of the International Monetary Fund urged rich-country governments not to squeeze their budgets so far that they stifle growth.

"For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans," Lagarde wrote in the Financial Times. "At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects."

France was caught in the market crossfire last week, with investors worrying about the financial health of the country's banks in particular and whether it would be the next country after the U.S. to lose its triple-A credit rating.

[Associated Press; By GREG KELLER and DAVID McHUGH]

McHugh reported from Frankfurt.

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