(AP Photo/Philippe Wojazer, Pool)
The Dow Jones industrial average fell, the euro slid against the dollar and key European markets edged down in off-hour trading after Chancellor Angela Merkel of Germany and French President Nicolas Sarkozy announced the results of their emergency talks in Paris.
Sarkozy called for a "new economic government" for Europe that would meet at least twice a year with European Union President Herman Van Rompuy as its head, but he offered few other details or indications that the body would have real power.
Merkel and Sarkozy also called for all euro zone nations to enact constitutional amendments requiring balanced budgets. They said they want the process completed by summer 2012, but it would almost certainly run into protracted political difficulties in many countries.
Both leaders said the moment was not right to replace 17 government bonds with a single one allowing weaker economies to borrow in cooperation with the powerhouse economies of France and Germany.
A growing number of experts are calling for the eurobond as a way to prevent the unaffordable interest rates that have driven Greece, Ireland and Portugal to seek bailouts from the eurozone countries and the International Monetary Fund.
New figures show slowing French and German growth, and the German government fears it would face higher borrowing costs and more risks if it had to borrow jointly with financially shaky nations.
"We have exactly the same position on euro bonds," Sarkozy said. "One day we could imagine them, but at the end of a process of European integration, not at the beginning."
The Dow fell as many as 190 points shortly after 1 p.m. in New York, a sign of clear market disappointment with the lack of immediate action.
Merkel and Sarkozy also said they did not want to increase the size of the EU's 440 billion euro rescue fund, which may have to take over a massive, multibillion euro European Central Bank program to support the prices of Spanish and Italian bonds by buying them up on the open market. The ECB spent $32 billion in the first week of the program alone and says it wants to hand off that responsibility in coming months to the rescue fund, or European Financial Stability Facility.
Sarkozy described the EFSF's current funding as "a considerable sum" and "sufficient."
The two leaders also proposed a Europe-wide tax on financial transactions and pledged to harmonize their countries' corporate taxes in a move aimed at showing the eurozone's largest members are "marching in lockstep" to protect the euro.
Shares of financial markets operators, such as NYSE Euronext and the IntercontinentalExchange Inc., already under pressure as part of a broader sell-off of financial stocks, tumbled.
NYSE Euronext fell 10 percent, or $2.87, to $26.10, leading the S&P 500 Index in percentage losses. The IntercontinentalExchange was not far behind, falling 5.5 percent, or $6.33, to $110.10, the third biggest loser on the S&P.
Investors may be concerned about how the euro bloc will put in place what its leaders have suggested and how a proposed tax on financial transactions may effect demand for European assets, said David Gilmore of Foreign Exchange Analytics in Essex, Connecticut.
"On the surface, it sounds very bold, a federal `eurozone,"' Gilmore said. "The practical part still seems, to me anyway, to be a pipe dream."
He said the plan to form a deeper fiscal union among the 17 countries using the euro "made the euro credible," but governments might not want to surrender their rights to set tax and budget policies.
But some analysts say only tighter fiscal convergence between the euro zone's 17 members, with the block's strongest members guaranteeing the debts of the weaker partners, will resolve a crisis that has dragged on for nearly two years and resulted in a string of sovereign bailouts worth hundreds of billions of euros.
Sarkozy and Merkel stressed their commitment to defending the common currency, a cornerstone of integration on this long-fractured continent. They presented their proposals after meeting Tuesday in Paris amid signs of economic slowdown, and after an exceptionally turbulent week on financial markets prompted by concern about Europe's financial health.
Sarkozy told reporters that he and Merkel want a "true European economic government" that would consist of the heads of state and government of all eurozone nations.
The new body would meet twice a year -- and more in times of crisis -- and be led initially by Van Rompuy for a 21/2-year term. After that, Sarkozy suggested, it could be opened up to other heads of states and government.
The move appeared a step toward the closer long-term economic integration that many analysts have said is inevitable to make the euro experiment survive, though it was unclear how much effect it would have in the short term.
"There has to be a stronger coordination of financial and economic policy" to protect the euro, Merkel said.
Some were not impressed.
"Investors might be left wondering what was the point of this meeting," said Neil MacKinnon, economist at VTB Capital in London. MacKinnon said the measures outlined amounted to "well-intentioned rhetoric" but are not the "silver bullet" needed to settle Europe's debt and banking crisis once and for all.
The chancellor stressed that the crisis built up over several years by the actions of several member states, and there is no solution to tackle the crisis within days now.
"We will regain the lost confidence," she said. "That is why we go into a phase with a new quality of cooperation within the eurozone," she added, referring to the proposal of forming a permanent economic government for the eurozone.
Sarkozy and Merkel will send a letter outlining their proposals to Van Rompuy on Wednesday.
The leaders want the new budget rules to be enshrined in euro zone constitutions by summer of next year. They said the common French-German corporate tax would be established by 2013.
The two leaders ruled out, however, issuing common government debt in the form of eurobonds, at least for now, despite demand by many investors for such a bold but politically difficult move.
Sarkozy said that euro bonds could be considered "one day, but at the end of a process of European integration, not at the beginning."
In afternoon trading in New York Tuesday, the euro slid to $1.4385 as investors digested the proposal for greater coordination. It had spiked to $1.4472 immediately after French President Nicolas Sarkozy and German Chancellor Angela Merkel announced their plan.
Late Monday, it was worth $1.4451.