Sarkozy, Merkel Set Bilateral Euro Talks

BERLIN—The leaders of Germany and France on Monday set out plans for a bilateral summit next week, pursuing an elusive solution to the euro-zone debt crisis amid further signs of weakening in the European economy.

French President Nicolas Sarkozy will make what has become a familiar trek from Paris to Berlin for Jan. 9 talks with German Chancellor Angela Merkel that will focus on preparations for a summit of all 27 European Union leaders at the end of January.

The French and German leaders' meeting will be the first of several gatherings this month, as European leaders seek to conclude negotiations on closer economic integration and more-robust surveillance of euro-zone budgets by the end of March.

In the two years since the onset of Greece's debt woes, the sovereign-debt crisis has spread through the euro zone and now threatens the global economy.

European leaders have failed to come up with a lasting solution, and as they return to their offices after the holidays,they face a worsening economy.

Reinforcing the gloomy outlook, a survey of purchasing managers published Monday showed that manufacturing activity in the euro zone declined for the fifth straight month in December.

A survey of Eastern European countries—major importers of capital goods from Western European countries such as Germany and France—also showed a decline in the largest manufacturing sectors.

Markit Economics said its euro-zone purchasing managers' index for the manufacturing sector edged up to 46.9 from 46.4 in November, in line with expectations, and still below the 50 threshold that distinguishes an expansion from a contraction.

The PMI data are a bad omen for fourth-quarter euro-zone GDP figures, as swaths of Europe appear to be descending into recession, further complicating efforts to resolve the crisis.

Throughout Europe, leaders tempered their New Year's addresses with warnings of dimmer economic prospects.

As speculation of a Greek sovereign default persists, Greek Prime Minister Lucas Papademos warned on New Year's Eve that the next three months were "particularly crucial" for the country's future.

In Italy and Spain, leaders appear to be making little progress battling the debt crisis, even as they impose severe budget cuts and higher taxes.

Belgium's Prime Minister Elio Di Rupo said Sunday that the financial crisis has "destroyed entire sectors of the real economy." He added that "2012 will be a decisive year. We will have to transform these difficulties into new opportunities."

Spain's new Finance Minister Luis de Guindos said Monday that the country's budget deficit might be higher than previously estimated. The government, which took over last month, announced €8.9 billion ($11.5 billion) in spending cuts for this year and €6 billion in tax increases.

The situation in Italy is also strained.

Despite new Prime Minister Mario Monti's austerity efforts, the costs to fund the country's long-term debt remained high at a bond auction last week, showing investors remain unpersuaded by efforts to resolve the European debt crisis.

Mr. Monti said Italy's economy would contract about 0.5% this year. He said failure to implement an austerity budget would have exposed Italy to the "risk of an explosive recession, which would have been far worse than a simple recession."

As European leaders search for a solution to the crisis, politics are getting in the way. Mr. Sarkozy, who faces an election in May, is reluctant to impose a new round of budget cuts on French voters.

Instead, he promised to make "important decisions" to bolster the French economy.

"This unprecedented crisis, probably the most serious since the Second World War, is not over," the French president said in a televised address on New Year's Eve.

"Right now, our priority must be working for growth, competitiveness and reindustrialization that will allow us to create jobs and boost spending power."

Germany still looks fairly robust. The German economy boasts record employment and is expected to grow 1% this year after growth of an estimated 2.9% in 2011.

Nevertheless, in her annual New Year's address, broadcast Saturday evening, Ms. Merkel warned times could get tougher. "Germany is doing well, even though the next year [2012] will doubtlessly be more difficult than this one," she said.

Europe's largest economy isn't doing enough to stem the crisis, some critics say. Even as Ms.

Merkel urges the rest of Europe to tighten its belt, Berlin has been easing efforts to cut its own deficit and reduce borrowing, sparking sharp criticism from Bundesbank President Jens Weidmann.

The German government expects to raise about €26.1 billion ($33.8 billion) in new borrowing this year, up from about €20 billion last year.

Mr. Weidmann believes the government will have to borrow even more than already planned amid the decline in the European economy, and urged it to lead by example in cutting public borrowing.

"As an anchor of stability in the monetary union, Germany has a special responsibility," Mr. Weidmann told the Berlin daily Tagesspiegel in an interview published Monday. "Germany must not relax its efforts."