UPDATE 1-Germany, France "set example" to euro zone on taxes

* Merkel, Sarkozy discuss tax harmonisation

* Both reject euro zone bonds, crisis fund top-up

(Adds details, quotes and background)

By Erik Kirschbaum

FREIBURG, Germany, Dec 10 (BestGrowthStock) – Germany and France
pledged on Friday to start harmonising their taxes as an example
to Europe of how to avoid future crises, while ruling out joint
euro zone bonds or topping up the current crisis fund.

German Chancellor Angela Merkel and French President Nicolas
Sarkozy said after a brief summit in Freiburg on the German
border with France that they both must set examples for the
currency bloc via closer fiscal harmony.

“We have agreed to the convergence of German and French tax
policies and I thank the German chancellor for this opening. It
is very important to be able to say to our partners, we are in
the euro zone, we must converge to defend the euro,” Sarkozy
told a joint news conference with Merkel.

“We should set an example on questions of competitiveness,
how far we can go beyond pure budget policy,” said Merkel.

The leaders of the two euro zone giants both rejected a
proposal for joint euro zone bonds, championed by Luxembourg
Prime Minister and Eurogroup chief Jean-Claude Juncker with
Italian support.

Juncker, chairman of finance ministers for the 16-nation
single currency area, floated the idea of creating a euro debt
instrument as a way of deterring market speculation.

Germany has energetically attacked the idea, which would tie
the borrowing costs of major European economies to peripheral
members such as Greece, Ireland and Portugal. This would push up
borrowing costs for countries like Germany and France.

Merkel and Sarkozy also ruled out topping up the existing
euro zone stabilisation fund (EFSF), worth 750 billion euro when
International Monetary Fund backing is included. It was set up
in the aftermath of the Greek bailout.

“I’d say for us in Germany that the question of expanding
the rescue mechanism is not now on the table,” Merkel said.

“Less than 10 per cent of the rescue mechanism has been used
for Ireland. It is not on the agenda,” said Merkel, adding
however that the euro would not be allowed to fail because it
“has a meaning that goes beyond a mere currency”.

“If the euro fails, Europe fails. That’s very serious,” she

The two leaders also set their sights on next week’s summit
of European Union leaders agreeing a permanent crisis mechanism
for the euro zone, requiring changes to the EU’s Lisbon treaty.

They annoyed some EU leaders when they last met bilaterally
in October in France’s Deauville to agree on Merkel’s proposal
for such a mechanism. Her insistence that private investors must
share in future sovereign debt risks unleashed market panic.

“The EU summit should give a sign that we are defending the
euro, which is why it is important to have a decision on the
permanent crisis mechanism and treaty change,” Merkel said,
adding this would be difficult “if Deauville hadn’t happened”.

Merkel also pledged to support the agenda of the French
presidency of the G8 and G20 next year and said euro zone member
states would do all they could to deliver stability.
(Reporting by Erik Kirschbaum and Berlin Newsroom, Writing by
Stephen Brown, Editing by Sonya Hepinstall)

UPDATE 1-Germany, France "set example" to euro zone on taxes