FREIBURG, Germany (Reuters) - Germany and France pledged on Friday to start harmonizing 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 stabilization 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 said.
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)