Sarkozy seeks 'rethought' Europe with treaty changes

President Nicolas Sarkozy this evening called for Europe to be "refounded" with France and Germany at its heart to create "a zone of stability".

His speech in Toulon came after the euro rose for a fourth straight session against the US dollar today after Spanish and French bond auctions drew better-than-expected demand from investors.

However, uncertainty remained over the outcome of talks between France and Germany that are aimed at brokering a deal on further economic integration within the single currency area.

In his address today, Mr Sarkozy said Europe must be "rethought" by taking in the lessons of the financial crisis, he said. He said the crisis in the world economy since 2008 is the result of a "globalisation without rules" and excessive public and private debt.

The French leader said France and Germany are in favour of European Union treaty changes to impose greater fiscal discipline, and announced he would meet Chancellor Angela Merkel next week.

Mr Sarkozy said there must be no more euro zone debt writedowns, beyond Greece. "It must be made clear that a debt of a euro member will be repaid . . . . It's a question of confidence."

He signalled his support for faster and more automatic sanctions against euro zone members that run oversized deficits. "Europe needs more solidarity but more solidarity requires more discipline."

The president said he had "no doubt that with the deflationary risk facing Europe, the European Central Bank will act".

The president also told his audience the world economy is entering a new cycle of deleveraging, and that France needs to reform its welfare system.

Ms Merkel will travel to Paris on Monday for talks on the euro zone crisis. The meeting comes ahead of a summit of European leaders in Brussels on December 9th, where possible changes to the EU treaties will be on the agenda.

"We will make French-German propositions to guarantee the future of Europe," Mr Sarkozy said, adding it would be "unpardonable" to turn back on close co-operation between France and Germany, and that both sides "must understand and respect" that they have different histories, institutions, and cultures.

Germany and France have said they will make joint proposals for more coercive powers to enforce budget discipline in the 17-nation currency area.

The single currency was up 0.3 per cent at $1.34760 today despite an earlier downbeat assessment of the European economy by new European Central Bank (ECB) Mario Draghi.

Spain sold €3.75 billion of three bonds at the top of the targeted range, although its cost of borrowing was the highest in 14 years and at levels seen as unsustainable for public finances.

France also found demand for its sale of €4.35 billion of debt in several maturities.

Earlier Mr Draghi signalled the ECB was ready to take stronger action to fight Europe's debt crisis if political leaders agree next week on much tighter budget controls in the 17-nation euro zone.

Speaking a day after the world's major central banks took joint action to provide cheaper dollar funding for starved European banks, he painted a dark picture of the state of the banking system.

"What I believe our economic and monetary union needs is a new fiscal compact - a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made," he told the European Parliament.

"We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short-term. Our answer is that it is definitely the most important element to start restoring credibility.

"Other elements might follow, but the sequencing matters." Mr Draghi did not spell out what action the ECB might take, but it is under huge political and market pressure to massively step up purchases of euro zone government bonds or to lend money to the IMF to support ailing Italy and Spain.

He added that the ECB had scope to act within the European Union treaty and the most important thing was to make sure that frozen credit channels start to work again.

Mr Draghi, who faces some of the toughest decisions in the currency's 12-year history after just one month in the job, said the ECB was aware many European banks were in difficulty because of stress on sovereign bonds, tight inter-bank funding markets and scarce collateral.

"Downside risks to the economic outlook have increased," he said, noting that the ECB's mandate was to maintain price stability "in both directions" - a rare indication that the bank is concerned about deflation risks as well as inflation.

Two years into Europe's debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.

Agencies