TOPWRAP 7-Germany, France pledge unity as markets falter

* Merkel, Sarkozy vow to work together on financial reform

* France announces German-inspired brake on budget deficit

* Euro rebounds from 4-yr low; U.S., European stocks fall

* U.S. Senate approves sweeping Wall Street reform

* Fed, China see threat to world economy, banks

By Steven C. Johnson and Yann Le Guernigou

NEW YORK/PARIS, May 20 (BestGrowthStock) – France and Germany
pledged on Thursday to work together to solve a European debt
crisis and support the euro, patching up a public rift that had
rattled markets around the world.

The unity pledge came as Germany’s parliament prepared to
vote on Friday on the country’s share of a 750 billion euro
rescue for euro zone countries in financial trouble.

The United States took a big step closer to the most
comprehensive overhaul of Wall Street rules since the 1930s
after a financial reform bill cleared a final Senate vote. For
details, see [ID:nN20244272]

France and Germany, co-founders of the euro, had clashed
over a unilateral German ban on some speculative trades on
Wednesday that spooked markets and sent the currency to a
four-year low beneath $1.22.

The euro rebounded sharply above $1.25 on Thursday. A
German spokesman said Chancellor Angela Merkel and French
President Nicolas Sarkozy had agreed to cooperate on euro-zone
growth strategies and coordinate their positions on world
financial rules at a G20 summit next month. [ID:nLDE64J2DK].

Germany and France have long been at odds over how to
handle Greece’s debt crisis, and their unity pledge did not
prevent U.S. and European stocks from falling or oil from
hitting an eight-month low.

Germany is the main EU donor in the bailout of Greece and a
$1 trillion financial safety net being created for other
indebted euro zone nations.

The opposition Social Democrats have threatened to abstain
from voting for Germany’s share of the rescue unless the
government supports a push for an international financial
transaction tax.

Although Merkel’s center-right coalition does not need
opposition support to win approval, it wants as much
cross-party backing as possible.

Markets also worried that deep spending cuts and tax hikes
would slow European growth and possibly derail a fledgling
global recovery.

In Washington, U.S. Federal Reserve Governor Daniel Tarullo
warned that failure to contain Europe’s problems could cause
global problems. [ID:nN20148593].

U.S. Treasury Secretary Timothy Geithner will visit Europe
next week, on his way back from a trip to China, and will meet
European Central Bank chief Jean-Claude Trichet among other
officials, his office said. [ID:nN20250083]

China said the crisis was adding to uncertainty, as
underlined by weakness in its own stock market.

“The euro for now is a secondary story. The danger is that
people are doubting the sustainability of the global recovery,”
said Boris Schlossberg, director of research at GFT Forex in
New York. “It’s bigger than the euro because everything is so
intrinsically woven together.”

Earlier, Sarkozy said France would enshrine in its
constitution a commitment to cut the country’s budget deficit.
a move aimed at reassuring markets and placating Berlin.

“This reform will oblige each government coming out of an
election to engage in a five-year path dealing with the
deficit,” Sarkozy said. [ID:nLDE64J1BG]

Though far less constraining than Germany’s “debt brake,”
which would force the federal government to limit the deficit
to 0.35 percent of national output by 2016, France’s move
highlights how the debt crisis is forcing all euro zone
countries to cut back on spending and trim their deficits.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graphic on Greek bailout maths, click:
http://link.reuters.com/rad45k
For a graphic on the eurozone, click:
http://link.reuters.com/fyw72j
For related news stories, click:
[nLDE64I0RB]
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Early this month, Greece was forced to adopt steep spending
cuts and tax hikes in exchange for a 110 billion euro ($135
billion) bailout from other euro zone governments and the
International Monetary Fund.

Last week Spain and Portugal, struggling with high deficits
that prompted investors to drive up their borrowing costs,
announced new deficit-cutting measures. Italy is planning
deficit reduction steps, as well, while France has proclaimed a
three-year public spending freeze.

Europe’s move toward more budget austerity was welcomed in
Washington, with White House spokesman Robert Gibbs stressing
that tough measures were required. [ID:nWEN5002]

U.S. CLOSES IN ON FINANCIAL REFORM

Tougher rules loomed for Wall Street after the U.S. Senate
backed a sweeping financial reform aimed at preventing a
recurrence of the 2007-2009 crisis.

The overhaul is a priority for President Barack Obama and
the bill includes measures such as requiring banks to split off
their lucrative swaps desks.

A final round of negotiations over the bill, and lobbying
by banks, has yet to take place as lawmakers must now reconcile
the Senate reform with a version previously approved by the
House of Representatives.

It was the other side of the Atlantic that attracted most
market attention on Thursday. Some investors worried that other
euro zone countries could follow Germany’s
lead and ban naked short-selling of some bonds and stocks.

Also on Thursday, Greeks staged another 24-hour general
strike, the latest protest against austerity measures demanded
by the EU and the IMF.[ID:nLDE64I272].

“IRRATIONAL MARKETS”

The euro has lost more than 12 percent against the dollar
this year, shedding 7 percent over the last month.

Jean-Claude Juncker, chairman of the forum of euro zone
finance ministers, said the weakness was likely due to fears
economic growth in the zone would slow. [ID:nTOE64I038].

But he insisted that the markets were acting irrationally.

“There is a certain reluctance to believe the Greeks can
overcome the current crisis. I don’t think the markets are
behaving in a rational way,” he told Reuters in Tokyo.

Irrational or not, anxiety was evident in Europe and
beyond. Zhu Guangyao, China’s assistant finance minister, said
Europe’s sovereign debt crisis “is a challenge to the stability
of the entire international financial market.”

Germany said restoring confidence in the euro was its “top
priority,” demanding tougher regulation and oversight.

But France, smarting from Germany’s failure to consult it
on the trading ban, earlier said it did not agree with Merkel’s
comment that the euro was under threat.

“I absolutely do not think that the euro is in danger,”
French Economy Minister Christine Lagarde told RTL radio on
Thursday. “The euro is a solid and credible currency.”

Investing Research
(Additional reporting by Holger Hansen and Brian Rohan in
Berlin, Emmanuel Jarry and John Irish in Paris, Renee Maltezou
in Athens; Writing by Steven C. Johnson in New York and Paul
Taylor in Paris; Editing by Kenneth Barry, Gary Hill)

TOPWRAP 7-Germany, France pledge unity as markets falter