Sarkozy and Merkel call for 'true economic government' to save eurozone

Plan for European economic government with single leader, drawn up after mini-summit, cautiously welcomed by UK

Nicolas Sarkozy and Angela Merkel want to synchronise nations’ tax policies as part of their attempt to save the eurozone. Photograph: Philippe Wojazer/AFP

France and Germany have set out plans to create the first "true European economic government" headed by a single appointed leader, as part of major moves to synchronise tax and spending to save the failing eurozone.

The French president, Nicolas Sarkozy, and German chancellor, Angela Merkel, announced the dramatic proposals after a two-hour mini-summit. They also called for the imposition of tighter restrictions on member country's deficits and announced a synchronising of the tax policies of their own two countries. Sarkozy has also secured the support of Merkel for a Tobin tax – a financial tax on all international transactions – to raise funds to ease the crisis engulfing the European economy.

The establishment of an economic government for the eurozone will be regarded by eurosceptics as a political power grab for Europe.

On Tuesday night, the British government gave a cautious welcome to the move, saying they would adopt a "watch and see" policy. A treasury source said: "This looks like the right direction but we need to see how it pans out. We will continue to advance UK interests at every opportunity." The government has no formal position on the Tobin tax, but has stressed that any such tax would need to be truly international to be successful and not disadvantage participating countries.

The proposals, on the day of dire growth figures for Germany, normally considered one of Europe's safest economies disappointed the markets.

Sarkozy said the most important element was the plan "to create a real economic government for the eurozone".

Merkel said "there has to be a stronger coordination of financial and economic policy" to protect the euro, adding: "We will regain the lost confidence. That is why we go into a phase with a new quality of cooperation within the eurozone."

The European Council president, Herman van Rompuy, will be asked to head the new economic government, and will set and enforce a deadline for all 17 eurozone members to reduce their deficits, putting pressure on countries such as Greece and Portugal to shore up public spending.

Merkel said they had rejected for now the idea of euro bonds, which would have pooled the members states' governments' debts to reduce the overall risk of the eurozone,but neither leader ruled their use out in the future. George Osborne has raised euro bonds as a possible mechanism for shoring up the eurozone, but the idea was politically unpalatable in the German coalition. There was also no movement on the expansion of the zone's €440 billion rescue fund, the European financial stability facility, seen by some as crucial to the future of the zone.

Merkel said all countries in the eurozone should enshrine balanced budgets in their constitutions. "I do not really think we can solve problems with stop-gap solutions," she said.

"We are looking at real, realistic step-by-step measures that we can use to gain back the trust that has been lost, and I do not think that euro bonds would help us in this.

"It's quite right that 17 countries need to make a step-by-step progress."

European markets hit by eurozone Robin Hood tax plans

Stock exchange shares and main indices lose ground as German chancellor Angela Merkel and French president Nicolas Sarkozy propose new financial transaction tax.

European exchanges would all be affected if traders were forced to pay a small fee every time they bought and sold stocks or currencies. Photograph: Alastair Grant/AP

Plans for a new Robin Hood-style tax on financial dealings hit shares in stock exchange operators on Wednesday, as the financial markets balked at the latest proposals to rescue the eurozone.

The prospect of tax rate harmonisation and a new financial transaction tax, as pledged by German chancellor Angela Merkel and French president Nicolas Sarkozy, did not ease fears over the stability of the region. The FTSE 100 fell 77 points in early trading to 5279, with other European markets also losing ground.

Shares in the FTSE 250-listed London Stock Exchange fell by 6% at the start of trading, with Germany's Deutsche Bourse and pan-European exchange NYSE Euronext suffering similar falls. The three exchanges would all be affected if traders were forced to pay a small fee every time they bought and sold stocks or currencies.

Sarkozy and Merkel pledged to create a "true European economic government" following their mini-summit in Paris on Tuesday. As well as a transaction tax, the pair agreed to harmonise taxes across their two countries and push for tougher deficit reduction across the eurozone.

Eurobonds, though, remained off-limits – to the disappointment of some analysts who believe that European countries must combine their borrowing needs to get through the turbulent financial markets.

Michael Hewson, market analyst at CMC Markets, said the measures announced in Paris were "all profoundly disappointing".

"The tax harmonisation plan will not go down well with other European Union countries, particularly Ireland where it has been a red line issue. There was no talk about boosting the European Financial Stability Fund and no talk about euro bonds, all rather disappointing, but not altogether surprising, given the political obstacles against them," said Hewson. "The main concern is about where future growth will come from, if Germany as the main heartbeat and cash generator of Europe catches a cold," he added.

GDP data released on Tuesday showed that the German economy barely grew in the second quarter of 2011.

Tax expert Richard Murphy welcomed the commitment to a transaction tax, calling it "a welcome and overdue move that needs replication way beyond the eurozone if the feral banking economy is to be brought under control".

Irish finance minister Michael Noonan said that any such tax should be imposed across the EU rather than just the eurozone. He also argued that the Franco-German plan to harmonise their corporation tax levels would not affect Ireland's current rate of just 12.5%.

Swiss franc in demand

Investors continued to flock to safe havens such as the Swiss franc, which gained 2% against the euro despite the Swiss Central Bank pledging to take steps to lower the currency's value.

Jane Foley, senior currency strategist at Rabobank, said the markets should have learned that the eurozone crisis will not be solved quickly, particularly as domestic political pressure prevents Merkel from moving swiftly into full fiscal union across the zone.

"Chancellor Merkel remains tied down by moral hazard. Even if she recognises that significant fiscal integration will be needed to save European monetary union she cannot openly admit this at this point," said Foley.

Warren Buffett calls for higher taxes for US super rich!

Warren Buffett, at the 2010 meeting of his Berkshire Hathaway investment group, says that billionaires like himself have been 'coddled' by Congress. Photograph: Nati Harnik/AP

In the process of accumulating one of the greatest fortunes the world has ever seen, Warren Buffett stands apart from the average squillionaire. Not for him the clichés of lavish mansions and superyachts, preferring instead his modest home in Omaha, Nebraska and nights in with burger and cherry cola.

Now Buffett has added to his list of atypical pronouncements by saying that America's super-rich should pay more tax if the country's debt problems are ever to be solved.

Writing in the New York Times on Monday, Buffett argued that the richest members of US society are indulged with an unfairly generous tax regime and are not making a fair contribution to repairing the country's finances.

"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks," wrote Buffett, whose personal fortune was estimated at $50bn (£30bn) by Forbes this year, making him the third richest person in the world behind Carlos Slim and Bill Gates.

"These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It's nice to have friends in high places," the 80-year old investor added.

Buffett, known as the Sage of Omaha, built his fortune on a no-frills investment strategy and was a fierce critic of the exotic financial investments that brought the banking system to it knees in 2008, dubbing them instruments of financial mass destruction.

A long-time critic of the US tax system, he has calculated that he handed over 17.4% of his income as tax last year – a lower proportion than any of the 20 other people who work in his office.

Under the debt ceiling deal agreed in Washington, a "super committee" of 12 congressmen and senators must find $1.5tn worth of savings and cuts to help cut America's national debt. Tax rises are hugely unpopular with elements within the Republican party, with the Tea Party movement adamant that America should balance its books by cutting public spending.

Buffett argues that this super-committee should raise the tax rate paid by those earning more than $1m a year, including earnings from capital gains which are currently taxed at a lower rate than ordinary income. Those raking in upward of $10m a year could then pay even more.

The package of tax cuts brought in by President George W Bush are set to expire at the end of 2012, although they could be extended. Many of the leading Republicans who hope to challenge Barack Obama at the next presidential election have argued for lower taxation to stimulate theUS economy.

On Saturday Rick Perry, the governor of Texas, argued that it was an "injustice" that almost a half of all Americans currently pay no federal income tax.

"Spreading the wealth punishes success while setting America on a course for greater dependency on government," Perry argued as heannounced his bid for the 2012 Republican nomination.

Buffett argues that the US policymakers should be looking at the other end of the spectrum. As he put it: "My friends and I have been coddled long enough by a billionaire-friendly Congress. It's time for our government to get serious about shared sacrifice."

German economic slowdown raises fresh eurozone fears.

Berlin's Fernsehturm (TV tower) reflected in a shop window. The fall in German GDP has been blamed on a slowdown in domestic demand and construction Photograph: Felix Clay

The German economy has come to a near-standstill in the last quarter as the global slowdown hit Europe's biggest player.

In the latest blow to the eurozone, Germany grew by just 0.1% between April and June. Economists had expected growth of 0.5% during the quarter. Germany's Federal Statistics also revised down the growth in the first quarter of 2011, to 1.3% from its initial estimate of 1.5%.

With France's economy failing to grow during the quarter, Germany's GDP data shows that the eurozone economy has worsened as its debt crisis entered a new, dangerous phase. The weak performance of the two countries dragged growth across the eurozone down to just 0.2%, Eurostat reported, with the wider European Union also growing by just 0.2%.

The German slowdown was blamed on a fall in domestic consumption and construction work during the quarter. It is a blow to Angela Merkel as she prepares to meet France's Nicolas Sarkozy to discuss the euro debt crisis.

Spanish GDP grew by 0.2% during the quarter, down from 0.3% in the first three months of 2011.

The UK economy also grew by 0.2% during the quarter, according to preliminary data issued last month.

End of the Wirtschaftswunder?

Carsten Brzeski of ING said that the German data was a "growth normalisation" rather than a "disappointment" on its own, as Germany should still grow by at least 3% this year. He warned, though, that the German economic recovery is clearly slowing.

"Looking ahead, the million-dollar question is whether a solid second quarter is the beginning of the end of the German Wirtschaftswunder [economic miracle] and whether recent market turmoil could push the economy back into recession," said Brzeski.

"While German politicians are currently racking their brains on the pros and cons of common eurobonds, the luxury of having an economy running at 'wonder' speed is fading away."

Gary Jenkins, head of fixed income research at Evolution Securities, said the German data will "only add to the concern of the market that we are running into headwinds that are going to make a difficult situation even worse".

French and German officials have already indicated that Merkel and Sarkozy will not discuss the idea of issuing eurobonds – debt backed by the whole eurozone rather than individual countries.

Jenkins believes that eurobonds appear to be the "least worst option at this stage".

He said: "A temporary fiscal union may be the endgame, where you have common bond issuance for five years that replaces all individual sovereign bond issuance, after which time that is phased back in over, say another five years. Thus you retain a modicum of moral hazard."

Stock markets across Europe fell in early trading, with the FTSE 100 dropping 73 points to 5277. The euro lost ground against the dollar, as traders reacted to the news that Germany had reached near-stagnation.

"Following on the back of weak GDP data announced by France this will further undermine any efforts to resolve the eurozone debt crisis," said Max Johnson, a broker at forex specialist, Currency Solutions. But he added: "Looking around the global economy, at least there will be few, if any, cases of schadenfreude."

Latvia leads the way

Some European countries managed to grow significantly faster than the 0.2% average recorded across the sector. Belgium expanded by 0.7%, Sweden by 1.0% and Finland by 1.2%. The most rapid growth was recorded by Latvia with a 2.2% increase in GDP during the second quarter of 2011, followed by Estonia with 1.8%.

Portugal, like France, was flat – an improvement on two quarters of 0.6% negative growth. Data for some countries was not released on Tuesday, including Ireland and Greece.

How President Obama can win – without approval

Barack Obama waves before boarding his bus outside in Cannon Falls, Minnesota; faced with his worst approval figure yet, the president went on the road to drum up support in key midwest battleground states. Photograph: Jim Watson/AFP/Getty Images

Issues of the day, and the questions pollsters ask about them, vary over time, but one poll has been a staple of our political media discourse for decades: the presidential approval rating. The question is typically formulated as "Do you approve or disapprove of how the president is handling his job?" and the question is asked regularly enough that you can track its response over time. So it is considered big news when a president's approval rating spikes – as President Obama's did after the death of Osama bin Laden – or dips, as it has during the recent debt ceiling and credit rating downgrade debacle. According to the most recent poll, Obama has hit an all-time low of 39%.

But what does this mean? It's not necessarily as dire as you might think. First of all, the US president isn't elected in a national vote, but rather via a series of winner-take-all statewide elections. In this context, the more important question for Obama than his national number is how he is performing in key swing states. Currently, he outperforms his national numbers in the crucial battleground of upper midwest states such as Minnesota and Iowa. Obama may also get a boost from unpopular extremist Republican governors in important swing states such as Florida (Rick Scott), Ohio (John Kasich) and Wisconsin (Scott Walker).

Approval numbers also oversimplify a complicated electorate. Throughout the healthcare reform debate, conservative commentators pointed to numbers showing a slight plurality of the public "disapproving" of Obama's handling of healthcare. But that was misleading, because liberals who wished Obama would promote a more left-leaning version of healthcare reform were included in that number. If you combined the people who liked healthcare reform with the people who thought it didn't go far enough, you had a strong pro-reform majority. Likewise, liberals who think Obama has been too moderate or weak-kneed may say they disapprove of Obama's job performance – but that hardly means they are going to vote Republican in 2012.

Elections are choices, and it's entirely possible for voters to dislike Obama but dislike his opponent even more. Congress, and congressional Republicans, are more unpopular, according to polling, than Obama is.

Obama still has plenty of time to improve upon his numbers. Two recent two-term presidents, Bill Clinton and Ronald Reagan, had even lower approval ratings at the same juncture in their first term.

Even so, Obama's approval rating is legitimate cause for concern among his staffers and supporters. No president has won re-election with a Gallup approval rating of 47% or less. The closest anyone has come was President George W Bush, who won re-election in 2004 with an approval rating of only 48%.

What was his secret? Relentlessly smearing his opponent, Senator John Kerry (Democrat, Massachusetts), a decorated war veteran, as a "Massachusetts liberal" and an unpatriotic "flip-flopper". By turning some voters who didn't care for Bush into anti-Kerry voters, and boosting turnout among his base, he won.

So, as Politico reports, Obama may adopt the same strategy against the Republican nominee. High-minded liberals may find that distasteful, but if they want to win, they may have no choice.

Obama tours midwest in move to win back support

Barack Obama waves before boarding his bus in Cannon Falls, Minnesota. Photograph: Jim Watson/AFP/Getty Images

President Barack Obama began a bus tour of the US midwest focused on jobs and the economy on Monday, aiming to leave behind doubts about his leadership that could dent his 2012 re-election prospects.

The three-day trip takes him to Minnesota, Iowa and Illinois, states he won in the 2008 presidential election, but could expose Obama to voters who, polls suggest, are furious about political gridlock in Washington as he begins serious campaigning for his 2012 re-election attempt.

The White House says Obama is on a listening tour to hear from Americans about the economy and talk about how to boost jobs and hiring. There are no plans announced for a major policy speech to roll out initiatives for economic growth.

With unemployment at just above 9%, jobs are expected to be the central issue for voters in next year's presidential and congressional elections.

Even some of Obama's fellow Democrats have expressed frustration that the president has not promoted plans to boost jobs growth more aggressively. Republicans blasted the trip as a taxpayer-funded "debt end" bus tour and hammered Obama over high unemployment, record national debt and the flagging economy.

Obama was distracted for much of the summer by a divisive debate over the debt and deficits that triggered a downgrade in the US credit rating and undermined the public's faith in Washington.

With his own poll numbers flagging, Obama will use the tour to tout his job-growth agenda, which includes extending a payroll tax cut, finalising free-trade pacts and authorising infrastructure projects to create positions for construction workers.

He will also try to channel citizens' anger about the bad economy against Republicans in Congress. Obama's job approval rating dipped below 40% – to 39% – on Monday in the Gallup daily tracking poll.

Obama will speak at a town hall style meeting on Monday in Cannon Falls before heading to Decorah, Iowa. He then holds a rural economic forum in Peosta, Iowa, on Tuesday and town hall meetings in Atkinson and Alpha, Illinois, on Wednesday before returning to Washington.

President Obama's re-election economic policy

Barack Obama's debt crisis deal may have averted catastrophy in the US, but only structural reform of the entire financial system can prevent future crises. Photograph: Jason Reed/Reuters

A front page story in Sunday's New York Times gave the country the bad news. President Obama is no longer paying attention to economists and economics in designing economic policy. Instead, he will do what his campaign people tell him will get him re-elected, presumably by getting lots of money from Wall Street.

The article said that President Obama intends to focus on reducing government spending and cutting programmes like social security and Medicare. This is in spite of the fact that: "A wide range of economists say the administration should call for a new round of stimulus spending, as prescribed by mainstream economic theory, to create jobs and promote growth."

In other words, President Obama intends to ignore the path for getting the economy back to full employment that most economists advocate. Instead, he is going to cut government spending – because his chief of staff and former JP Morgan vice president Bill Daley and his top campaign adviser David Plouffe both say this is a good idea.

While people are justified in having little respect for economists – almost the entire profession missed the $8tn housing bubble that crashed the US economy – it is still scary to see that policy will be determined by people with no knowledge of economics whatsoever. After all, do Daley and Plouffe even have a theory as to how cutting government spending could help the economy?

There, of course, is a theory as to how budget cuts could boost growth. The theory is that lower deficits in the present and/or near future will reduce fears that government spending will be crowding out private economic activity. This would lead to lower interest rates. Lower interest rates will provide a boost to investment and consumption. Also, lower interest rates in the United States will make dollar assets less attractive to investors. This will cause the dollar to decline against other currencies, improving our trade balance.

However, no part of this story makes sense in the current economic environment. US interest rates are already at ridiculously low levels, with the 10-year Treasury rate falling below 2.2% in the wake of the recent euro crisis. Does anyone really believe that the rate will go much lower even with large cuts to the budget?

Furthermore, even if interest rates did fall, it is difficult to believe that it would have much impact on either investment or consumption. Investment is not very responsive to interest rates even in the best of times. It is extremely unlikely that firms will rush to buy new equipment even if interest rates were to take another large plunge, when most are still operating with vast amounts of excess capacity.

Consumers remain heavily indebted due to the collapse of house prices. Furthermore, the huge baby boom cohort is going to feel more need to save than ever with the government slashing its social security and Medicare benefits.

The trade side of the picture doesn't look much better. The dollar continues to be a safe haven in uncertain times. Furthermore, China and other export dependent countries care little about US interest rates; they want to protect their markets in the United States. They are likely to keep the dollar from falling too much against their currencies no matter how low interest rates fall.

For these reasons, it is unlikely that cutbacks in government spending will do much to lower the dollar and reduce the trade deficit. These would be the points that economists would make if President Obama was still paying attention to them. And if there are effective rebuttals within economics to these arguments, they are not easy to find.

But President Obama is apparently not listening to economists anymore, so he wouldn't care, in any case. Just as we have many politicians who ignore climatologists in the design of energy policy, and politicians who think that biology has no place in teaching the origins of species, we now have politicians who think that economics has no place in designing economic policy.

This could be viewed as comical, but tens of millions of lives stand to be ruined. Ever since Keynes, we have known how to bring an economy back to full employment after it has fallen into a slump. Keynes's basic insights have been supported by a vast amount of economic research over the last seven decades. And that the limited stimulus pushed through by Obama in 2009 worked pretty much as predicted in generating growth and jobs.

But evidence, apparently, doesn't matter at the White House any more.