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European economic government proposed by Merkel, Sarkozy

The leaders of France and Germany called Tuesday for greater economic discipline and unity among European nations but declined to take the expensive financial measures seen by many investors as the only way to halt the continent's spiraling debt crisis.

The Dow Jones industrial average fell, the euro slid against the dollar and key European markets edged down in off-hour trading after Chancellor Angela Merkel of Germany and French President Nicolas Sarkozy announced the results of their emergency talks in Paris.

Sarkozy called for a "new economic government" for Europe that would meet at least twice a year with European Union President Herman Van Rompuy as its head, but he offered few other details or indications that the body would have real power.

Merkel and Sarkozy also called for all eurozone nations to enact constitutional amendments requiring balanced budgets. They said they want the process completed by the summer of 2012, but it would almost certainly run into protracted political difficulties in many countries.

Both leaders said the moment was not right to replace 17 government bonds with a single one allowing weaker economies to borrow in cooperation with the powerhouse economies of France and Germany. A growing number of experts are calling for the eurobond as a way to prevent the unaffordable interest rates that have driven Greece, Ireland, and Portugal to seek bailouts from the eurozone countries and the International Monetary Fund.

New figures show slowing French and German growth, and the German government fears it would face higher borrowing costs and more risks if it had to borrow jointly with financially shaky nations.

Merkel and Sarkozy also said they did not want to increase the size of the EU's 440 billion euro rescue fund, which may have to take over a massive, multibillion euro European Central Bank program to support the prices of Spanish and Italian bonds by buying them up on the open market. The ECB spent 22 billion euros ($32 billion) in the first week of the program alone and says it wants to hand off that responsibility in coming months to the rescue fund, or European Financial Stability Facility.

The two leaders also proposed a Europewide tax on financial transactions and pledged to harmonize their countries' corporate taxes in a move aimed at showing the eurozone's largest members are "marching in lockstep" to protect the euro.

Investors may be concerned about how the euro bloc will put in place what its leaders have suggested and how a proposed tax on financial transactions may affect demand for European assets, said David Gilmore of Foreign Exchange Analytics in Essex, Connecticut.

"On the surface, it sounds very bold, a federal 'eurozone,' " Gilmore said. "The practical part still seems, to me anyway, to be a pipe dream."

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