The leaders of France and Germany agreed Tuesday on longer-term political solutions to address European debt woes but failed to establish the shorter-term financial rescue measures that many experts had hoped for, which sent nervous investors scurrying from the markets after a days-long stretch of gains.
German Chancellor Angela Merkel and French President Nicolas Sarkozy emerged from a meeting in Paris with a plan to better co-ordinate European economic policy, including what Sarkozy dubbed a "true European economic government." The body would consist of heads of state and other officials from all eurozone nations, and would meet twice a year.
The two leaders also agreed to harmonize their countries' corporate taxes in an effort to show other European nations they are committed to protecting the euro, which is considered necessary for further integration on the continent.
"There has to be a stronger co-ordination of financial and economic policy" to protect the euro, Merkel said, adding that with better integration will come greater confidence in Europe's financial fortunes.
While the talk of greater integration was met with approval from financial analysts, it is unclear what effect the political measures will have in the short term. Experts had hoped the two leaders would agree to boost the size of the eurozone rescue fund. They also wanted to see an agreement to issue government debt in the form of eurobonds, something investors are keen on.
Worries over sovereign debt in countries such as Greece, Portugal and Spain, which has been a wet blanket on markets, worsened last week over questions about the solvency of French banks. Investors have also been scared off by concerns about the European Central Bank's ability to get control of the debt crisis.
On Tuesday, more bad news emerged, this time from economic powerhouse Germany, where new data showed the gross domestic product expanded by a mere 0.1 per cent between April and June. That news comes a day after France announced its economy is also stalled.
BNN's Kim Parlee said because Germany is still the economic power in the region, any solution to the European debt crisis will likely come from German lawmakers, which will create tensions in other countries.
"When you give up economic power from one country to another, you're essentially giving up sovereignty," Parlee said. "It's a very sensitive issue right now, as it has been in the past."
The grim picture weighed on stock markets Tuesday and sent the euro plunging 0.26 per cent. The S&P/TSX composite index dropped 152.9 points to 12,530, erasing a 141-point gain on Monday. Meanwhile, the Dow Jones industrial average dropped 76.97 points to 11,405.93 while the S&P 500 fell 11.7 points to 1,192.76.
TD chief economist Craig Alexander said the sluggish growth numbers from France and Germany have spooked investors, who are looking for signs of a European recovery.
"Markets are really worried about where the European economies are headed," Alexander told CTV News. "And the concern is after the stall in the second quarter, we could see greater weakness in the third and fourth quarters of this year."
While figures out of the United States Tuesday showed a one-per-cent uptick in factory production in July, investors still have received little indication that the economic picture in the U.S. is improving, which is a further drag on the markets.
"They've thrown a whole lot of stimulus on the monetary and fiscal side at this recovery," said Tyler Mordy of Hahn Investment Stewards, "and now we're seeing growth slowing."
On Friday, nervous investors in Canada will get a better idea of how the uncertainty in the U.S. and Europe is affecting the Canadian economy. Both Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney will appear before a parliamentary committee to discuss the recent market turmoil.
With a report from CTV's John Venavally-Rao
