WRAPUP 3-Germany, France vow tighter policy coordination

* Sarkozy, Merkel agree to align tax, labour policy

* Both reject Eurobond idea, increase in rescue fund

* Euro eases, spreads edge up in thin end-year trading

* ECB places ball in governments’ court

(Adds Trichet comments and market reaction)

By Erik Kirschbaum and Emannuel Jarry

FREIBURG, Germany, Dec 10 (BestGrowthStock) – Germany and France
pledged on Friday to better align their tax and labour policies
to foster convergence in the euro zone, but rejected calls for
an increase in the bloc’s rescue fund and joint sovereign bonds.

Earlier on Friday, European central bankers had told euro
zone governments they could not count on the ECB alone to solve
a debt crisis which has forced bailouts of Greece and Ireland,
and heaped pressure on countries like Portugal and Spain.

At a news conference in the southwestern city of Freiburg,
Chancellor Angela Merkel and French President Nicolas Sarkozy
presented a united front ahead of a crucial summit next week
where EU leaders are expected to agree the terms of a permanent
rescue mechanism for the bloc.

Berlin has opposed calls by Spain and other countries to
move towards a full-fledged “fiscal union” in the 16-nation bloc
but appeared on Friday to have agreed to a limited form of
policy coordination, although little detail was offered.

“We have agreed to the convergence of German and French tax
policies and I thank the German chancellor for this opening,”
said Sarkozy.

Merkel said it was up to Germany and France to set an
example on questions of competitiveness, showing partners how
far the bloc’s biggest economies could cooperate in areas
“beyond pure budget policy”.

“We are talking about labour law, about tax law and if we
are to improve the coherence of the economic aspects of the euro
zone, then we should target these issues step by step and
propose solutions,” Merkel said.

The two leaders said they would present “structural”
proposals next year in the area of economic coordination, but
declined to elaborate.

“We will defend the euro, because the euro is Europe,”
Sarkozy said. “Our determination, both German and French, is
total.”
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Euro zone graphic package http://r.reuters.com/hyb65p

For more euro zone debt stories, click [ID:nLDE6T0MG]

For Breakingviews column, click [ID:nLDE6B90IR]
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ECB WARNINGS

Pressure on high-deficit euro members eased slightly over
the past week after the ECB bought government bonds in a thin
end-of-year market, pushing down the borrowing costs of
countries on Europe’s southern periphery.

But the ECB said its responsibility was to ensure price
stability, while dealing with the crisis was ultimately up to
the euro zone governments.

“We expect all other authorities to be up to their
responsibilities,” ECB President Jean-Claude Trichet told a news
conference in Madrid. [ID:nLDE6B91G8]

Bank of Italy Governor and ECB Governing Council member
Mario Draghi told the Financial Times the ECB could go only so
far in helping weaker members by buying their bonds.
[ID:nN09256153]

“I’m only too aware that we could easily cross the line and
lose everything we have, lose independence, and basically
violate the (EU) treaty,” said Draghi, a leading candidate to
replace Trichet.

The euro (EUR=: ), which fell to a 10-week low under $1.30
late last month as the euro crisis deepened, edged higher in the
wake of Trichet’s comments to trade at $1.3232.

The risk premiums investors demand to hold Portuguese
(PT10YT=TWEB: ) and Spanish (ES10YT=TWEB: ) debt instead of German
benchmarks edged higher on the day.

The EU summit is expected to finalise plans to introduce a
permanent rescue mechanism for the euro zone to replace the 750
billion euro European Financial Stability Facility (EFSF) that
it set up in May after bailing out Greece.

German demands that the new mechanism include the
possibility of so-called “haircuts” for holders of euro zone
sovereign debt have been blamed for exacerbating the crisis by
scaring bond investors with the prospect of not getting all
their money back.

European Central Bank Governing Council member Yves Mersch
said expanding Europe’s financial stability fund would be
preferable to issuing euro area bonds in the short term to
tackle any debt problems. [ID:nLDE6B90YG]

But Merkel rejected calls to increase the EFSF.

“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 percent of the rescue mechanism has been used for
Ireland. It is not on the agenda,” she said.

Sarkozy also supported Merkel by coming out against a
proposal pushed by Eurogroup President Jean-Claude Juncker and
Italian Finance Minister Giulio Tremonti for so-called E-bonds,
or joint euro zone sovereign debt issues.

“I don’t think we were consulted before this idea was
proposed, so it shouldn’t insult anyone if we say we are not in
agreement with it,” Sarkozy said, saying neither German nor
French citizens could accept “mutualising” euro zone debt.

Trichet asked that proposals on the bonds “be floated when
we have a decision to communicate”, which was not yet the case.
(Additional reporting by Stephen Brown, Paul Carrel, Sarah
Marsh in Berlin, Catherine Bremer in Paris, writing by Noah
Barkin, editing by Mike Peacock)

WRAPUP 3-Germany, France vow tighter policy coordination