Euro Gains as Merkel and Sarkozy Meet to Discuss Fiscal Ties, Jobs

German Chancellor Angela Merkel and French President Nicolas Sarkozy meet on Monday to discuss how to promote growth in the euro zone and to finalize a deal for closer budgetary ties within the single-currency union. They may also discuss a financial transaction levy, known as the “Tobin tax”, and options for boosting employment.

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The euro gained as the leaders of the 17-nation currency union’s two biggest economies met, appreciating 0.3 percent to $1.2759 at 9:05 a.m. in New York, snapping a three-day decline that left the euro at a 16-month low against the dollar at the end of last week.

Both employment and the Tobin tax are pressing issues for Sarkozy, who faces an election in less than four months. France has to contend with British resistance of the transaction tax, with the U.K. only willing to agree to it if adopted on a global scale so as not to give London a competitive disadvantage, as well as the highest level of jobless claims in 12 years as the country expects a record trade deficit for 2011.

French Prime Minister Fran├žois Fillion has not ruled out the prospect of austerity measures, which usually include salary and payroll cuts for public workers, though he predicts France’s fiscal gap will probably be narrower than forecast this year.

Sarkozy will pursue the financial transaction tax, which he has set out as a priority ahead of this year’s election, and which on Friday he vowed would be implemented in France if nowhere else, though Sarkozy and Merkel both want the tax to be applied across the EU.

Paris and Berlin want the tax applied throughout the EU, not just the euro zone, but Britain is resisting, fearing that such a tax would damage London’s competitiveness in the financial industry. London is one of the world’s major financial centers and a mainstay of the British economy. Much of the money levied by the Tobin tax would come from the U.K.

British Prime Minister David Cameron has vowed to veto any legislation for a financial transaction tax unless it proposes imposing the tax globally. French daily Le Monde said on Monday that Sarkozy might limit his ambitions for the time being to a simple levy on share purchases, while putting off instituting taxes on derivatives and/or bonds until a later stage. So far, neither the finance nor budget ministers’ offices have commented on the report.

Also on the docket for today’s meeting are stronger budgetary rules for euro-zone countries, which German officials expect will go over well at the upcoming EU summit. An updated version of the EU’s “fiscal compact”, which would give Brussels the right to take states to court if they violate strict budget rules, is nearing approval. Reaching an agreement on the fiscal compact by the next EU meeting on Thursday “is not out of the question,” said Elmar Brok, a German member of the European parliament.

This week, Merkel will also meet with International monetary Fund Managing Director Christine Lagarde, for what is being called an “informal exchange of views.” Germany has favored a proposal to boost IMF funding so that the international organization could open larger credit lines to troubled euro-zone states if needed, in exchange for strict budget adjustments.

But Italy, the euro zone’s third-biggest economy behind France and Germany, would prefer to avoid reliance upon the IMF in any crisis plan. Concern over Italy, which is facing a mountain of debt and a large fiscal deficit, has led French and German leaders to strengthen ties with the country’s interim leader, Prime Minister Mario Monti, who met with Sarkozy in Paris last week and will meet with Merkel on Wednesday.

The three will meet again in Italy on January 20 ahead of a meeting of EU finance ministers set to take place on January 23 and and the EU summit scheduled for January 30.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com