European markets slide ahead of crunch Merkel, Sarkozy summit

Aug 16, 2011, 9:07 GMT

Paris - European markets resumed their downward slide Tuesday morning, ahead of a crunch summit between German Chancellor Angela Merkel and French President Nicolas Sarkozy on the eurozone debt crisis.

France's leading CAC 40 index and Germany's DAX index had both fallen by over 2 per cent by mid-morning, while London's FTSE was down by over 1.2 per cent following the release of statistics showing Germany's economic growth fell sharply in the second quarter.

The 0.1 per-cent growth figure was far below economists' forecasts of 0.5 per cent growth and came days after France's economy was revealed to have stopped growing altogether in the second quarter.

The markets' slide also followed attempts by Germany and France to downplay expectations of a 'big-bang' solution to the debt crisis at Tuesday's summit.

Merkel and Sarkozy are to discuss how to improve governance of the eurozone.

The meeting at the Elysee Palace had been planned since a eurozone leaders summit in July.

But it took on added significance after markets went into a tailspin last week over concerns about the rising borrowing costs of Italy and Spain and speculation that France could be next after the United States to lose its AAA debt rating.

Some eurozone members, such as Italy, have been calling for the creation of common eurobonds, which would see countries with the euro effectively guarantee each other's debt.

Germany's government opposes such a move, outwardly at least.

A government spokesman on Monday said the creation of eurobonds was not even up for discussion between Sarkozy and Merkel on Tuesday.

France concurred, saying creating eurobonds would require a degree of economic and budgetary convergence among countries 'that we have not yet reached.'

France has also ruled out putting pressure on Germany to agree an increase to the 440-billion-euro European Financial Stability Facility rescue fund.

Instead, Merkel and Sarkozy are expected to come up with less ambitious proposals, such as improving coordination of budgetary policies by organizing more regular meetings of eurozone leaders and a beefed-up 'eurozone leader' role for European Council President Herman Van Rompuy.

France's Les Echos financial daily reported France and Germany might also propose mandatory budgetary caps for eurozone members - to be written into national constitutions.

Ahead of the meeting Sarkozy was to meet with Prime Minister Francois Fillon to discuss France's public deficit, which France has vowed to cut from 5.7 per cent this year to 3 per cent in 2013.

Analysts say that, after Italy, France could be next to announce austerity measures.

Writing in the Financial Times, International Monetary Fund chief Christine Lagarde warned of draconian austerity measures.

While recognizing 'an unmistakable need to restore fiscal sustainability through credible consolidation plans,' Lagarde warned that 'slamming on the brakes too quickly will hurt the recovery and worsen job prospects.' dpa cb dms Author: Clare Byrne

Berlin (dpa) - The German economy slowed sharply in the second quarter, adding to signs that global growth has lost momentum, data released Tuesday showed.

The statistics office said gross domestic product in Europe's biggest economy came in at a lower-than-forecast 0.1 per cent in the three months through June 30 after posting a downwardly revised 1.3-per-cent expansion rate in the first quarter.

The decline in growth came despite a pickup in both exports and investment. But dragging down growth in the country was a slackening in the building sector as well as in consumer spending.

Economists had expected the data would show growth as coming in at 0.5 per cent in the second quarter from a previously estimated robust 1.5 per cent in the first three months of the year.

'The speed of the recovery is slowing and the economy has returned to normality,' said ING Bank economist Carsten Brzeski.

The economy grew by a price-adjusted 2.8 per cent in the second quarter compared with the same quarter in 2010.

The release of the German GDP data follows a series of downbeat economic news from around the world in the wake of Europe's debt crisis, Japan's devastating earthquake, a series of downgrades to growth in the US and the attempts by China to cool down the world's second biggest economy.

Added to this are concerns that the fallout from the recent wave of turmoil across global financial markets could also undercut world economic growth.

The German GDP data followed the publication last week by France's statistics office showing the 17-member eurozone's second largest economy stalled during the second quarter.

Instead of a predicted 0.3 per cent, France chalked up zero growth in quarter after growing by 1 per cent in the first three months.

Signs that Europe's major economies are stagnating are likely to add to market concerns about whether the region's heavily indebted states will be able to pay down high debt levels at a time of weak economic growth. This was one of the main worries behind the recent global market shakeout.

Going forward, Germany's export-dependent economy is likely to face fresh headwinds as nations around the world step up moves to reduce high debt-and-deficit levels run up to shield their economies from recession.

In particular, this includes the new austerity plans announced this month by two of Germany's key trading partners in the eurozone - France and Italy.

Still, many economists think that the German economy will turn in another solid performance of about 3 per cent this year after it bounced back from the 2009 recession to grow by 3.6 per cent in 2010.

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