Instant view: Sarkozy, Merkel push more euro zone ties

NEW YORK (Reuters) - French and German leaders proposed a tax on financial transactions and closer joint governance of economic policy to stop the debt crisis in Europe, but did not propose increasing the euro zone bailout fund or selling euro zone bonds, French President Nicolas Sarkozy said on Tuesday.

KEY POINTS: * After talks in Paris, Sarkozy said he and German Chancellor Angela Merkel were also proposing that all 17 euro zone countries commit to balanced finances and write that goal into their constitutional law by summer 2012. * "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:

TOM BENTZ, DIRECTOR, BNP PARIBAS COMMODITY FUTURES, INC, NEW YORK, NY:

"There was no major news coming out of this, so it looks like a bit of buy rumor, sell fact. The market was hoping for some kind of euro bond deal, but that doesn't look likely, so maybe that pulled the market lower."

FRANK MCGHEE, HEAD PRECIOUS METALS TRADER, INTEGRATED BROKERAGE SERVICES LLC, CHICAGO

"At the end of the day, it's going to put worries back into the market about the euro and euro zone that may have been quieting down. It's going to add additional volatility into the gold market.

"I think the concept is correct. I think they have a major commitment in seeing the euro hold intact. But at the same time, they have to go through some very significant bailouts prior to being able to worry about accomplishing what they are able to do.

"So, they are going to weaken the euro significantly in terms of its exchange rate before they can try to pull it together."

CHRISTIAN COOPER, HEAD OF U.S. DOLLAR DERIVATIVES TRADING, JEFFERIES & CO., NEW YORK

"The uncertainty over the euro zone bond issuance at large is what caused the rally the bond market and the sell-off in equities. Merkel said one thing about euro zone bonds. Sarkozy said the opposite immediately afterward. They clearly have to clarifying their comments because it showed they were not on the same page."

DOUGLAS BORTHWICK, MANAGING DIRECTOR, FAROS TRADING, STAMFORD, CONNECTICUT:

"Both Chancellor Merkel and President Sarkozy are entirely correct that euro bonds won't help today. This is because Europe still has to pass numerous laws to allow this to happen. We believe today's press conference lays the groundwork for European fiscal union. First the union needs to be created and agreed upon, and then, as President Sarkozy adds, there could be the final step of integration. The ingredients must be gathered before the pie is baked, and this is exactly what France and Germany are lining up with their discussions."

MARC CHANDLER, GLOBAL HEAD OF CURRENCY STRATEGY, BROWN BROTHERS HARRIMAN, NEW YORK:

"Overall there are a lot of questions marks coming out of this summit and we have still not seen anything to address the problems in France, the fact that the European Financial Stability Facility still does not have enough resources to buy debt, and how the euro zone can rekindle growth.

"This does not seem to be a game-changer or a show-stopper. I am also not sure how much support it will get. This is essentially a Franco-German condominium and they want to impose their will on everyone else. Market participants went into this summit with low expectations and they certainly met those low expectations."

MOHAMED EL-ERIAN, CO-CHIEF INVESTMENT OFFICER AT PACIFIC INVESTMENT MANAGEMENT CO., NEWPORT BEACH, CALIFORNIA:

"A strong message from Germany and France that the euro zone's policy focus should be on further economic integration and broad-based fiscal discipline and not on additional financing for peripheral economies."

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