Franco-German push for 'true euro economic governance' under Van Rompuy

Speaking at a joint news conference, German Chancellor Angela Merkel and French President Nicolas Sarkozy urged much closer economic and fiscal policy in the eurozone.

The two leaders called for bi-annual meetings of the 17 heads of the Eurozone governments, chaired European Council president Herman van Rompuy.

Markets however reacted negatively to the conference, with some investors saying that they were expecting bigger announcements.

In New York, the Dow Jones Industrial Average fell 1.3% during and after the press conference, which took place after the close of trading in Europe, but recovered later.

Government bonds in the US and Germany - seen as safe havens in any economic downturn – however rallied in reaction to the leaders' comments.

The two leaders however did not back joint euro bonds, seen by many as a solution to the euro zone's debt problems, saying this could only be envisaged as a longer-term option. They also stopped short of increasing the euro zone's EFSF rescue fund, which currently stands at €440 billion.

"We have exactly the same position on euro bonds," Sarkozy told a joint news conference with Merkel after their talks. "Euro bonds can be imagined one day, but at the end of the European integration process, not at the beginning," he said.

Their message was that the focus should be on further economic integration rather than signing bailout cheques, reportedly an apparent concession to Angela Merkel.

Merkel proposed that a requirement for Eurozone members to balance their budgets should be enshrined in each of their constitutions.

"We will regain the lost confidence," she said. "That is why we go into a phase with a new quality of co-operation within the Eurozone."

In another initiative to increase tax revenues, Merkel and Sarkozy suggested harmonising corporate tax rates across the single currency - something likely to be strongly opposed by the low-tax Republic of Ireland.

However, Germany's insistence on government austerity across the Eurozone has been criticised by some economists for undermining the economic recovery.

The two leaders were meeting in Paris in the wake of last week's turmoil on the financial markets, which came amid fears of a renewed global recession and over the ability of Spain and Italy to repay their debts.