French President Nicolas Sarkozy and German Chancellor Angela Merkel at the Chancellery in Berlin, 9 Jan 12
Germany is now clearly the stronger partner in the Berlin-Paris alliance

France’s President Nicolas Sarkozy has begun eurozone crisis talks in Berlin with the German chancellor amid gloomy economic prospects for 2012.

EU leaders are facing multiple pressures on the 17-nation eurozone in the run-up to a summit on 30 January.

Chancellor Angela Merkel insists on tougher penalties for countries that violate eurozone budget rules.

The liquidity of European banks remains a big worry, as economic stagnation takes its toll on lending.

Economic data suggest that the eurozone is heading for recession in 2012. The German economy remains much healthier than the struggling eurozone periphery economies, especially Greece and Italy.

The need to revive growth and create jobs is high on the EU leaders’ agenda, although many economists argue that the drive for austerity is stifling growth prospects.

Controversial taxMr Sarkozy has suggested France could introduce a financial transaction tax as early as February, though Germany says such a tax must be EU-wide.

The UK government says it will only consider introducing such a tax if there is global agreement on it.

Mr Sarkozy is anxious for France to keep its cherished AAA credit rating as he campaigns for re-election in April.

He holds the banks largely responsible for the debt crisis and sees the financial transaction tax as a fair measure to ease the burden on taxpayers – a message that may appeal to voters.

Twenty-six of the EU’s 27 members have agreed in principle to a new, inter-governmental treaty to stabilise the euro. The UK refused to sign.

However, it is not yet clear how the treaty would operate alongside existing EU structures.

The so-called “fiscal compact” will include automatic sanctions, which can only be blocked by a majority of powerful states.

Mrs Merkel will meet International Monetary Fund (IMF) chief Christine Lagarde in Berlin on Tuesday, to consider how to proceed with the rescues of debt-laden eurozone economies.

Negotiations on a second massive bailout for Greece will have to be completed soon if it is to avoid a disorderly default.

Italy and Spain are also saddled with huge debts, which will have to be refinanced this year. Their borrowing costs remain unsustainably high and neither economy could be bailed out with the eurozone’s current rescue fund.

Hungary – outside the eurozone but dependent on it – has seen its sovereign debt downgraded to junk status. It is seeking an IMF standby loan amid a row over its economic policies and weak investor confidence.

Global Economy