Instant view: Sarkozy, Merkel propose greater euro zone ties

NEW YORK (Reuters) - French and German leaders are proposing greater ties in the euro zone that would involve electing a president but did not propose increasing its bailout fund or selling euro zone bonds, officials said on Tuesday.

KEY POINTS: * France's President Nicolas Sarkozy said he and Germany's Chancellor Angela Merkel are determined to defend the euro currency. * "The first of these propositions is to create a real economic government for the euro zone. This economic government will be made up of ... heads of state and government that will meet twice a year, and more if necessary. It will elect a stable president for two and half years," Sarkozy said in a press conference. * The proposals include asking the 17 euro zone countries to put in a deficit limit rule in each government's constitutions by 2012. * Sarkozy and Merkel said they are not proposing common euro zone bond sales at this time.

COMMENTS:

ANDREW WILKINSON, SENIOR MARKET ANALYST, INTERACTIVE BROKERS, GREENWICH, CONNECTICUT:

"Investors were looking for some big-picture solution to the euro zone debt crisis. Looking at these headlines, I don't think much has been achieved. There's a desire among investors for some kind of harmonization of government bond issuance, and I don't see that yet. It seems to be more the case that the dollar is on the back foot, so the timing of the announcement couldn't have been better for the euro since it was already rising."

FABIAN ELIASSON, HEAD OF U.S. CURRENCY SALES, MIZUHO CORPORATE BANK, NEW YORK

"The euro is reacting pretty positively. The market was expecting maybe a little more, but it's pretty solid first step."

RICHARD FRANULOVICH, SENIOR CURRENCY STRATEGIST, AT WESTPAC, NEW YORK:

"Sarkozy talks about common governance for the euro zone, which I think is one step closer toward a fiscal union. That's positive for the euro overall. However, there was a headline on taxing financial transactions which is not good for euro zone banks. On balance though, fiscal consolidation is more important and that has shored up the euro."

MARKET REACTION: STOCKS: U.S. stocks rallied BONDS: U.S. bond prices pared gains FOREX: The dollar turned negative against the euro