European leaders call for action as economy hits wall

NEW YORK (CNNMoney) -- The leaders of France and Germany on Tuesday called for more integrated economic policies to help stabilize the euro and restore growth across the European Union.

But the comments disappointed many on Wall Street who were hoping the leaders would announce new plans to contain the sovereign debt crisis roiling global markets.

French President Nicolas Sarkozy and German Chancellor Angela Merkel met in Paris to discuss, among other things, a proposed "golden rule" to require all 17 members of the currency union to commit to balanced budgets.

The goal, they said, is to promote greater "convergence" among the policies of the core members of the EU, such as France and Germany, with those of the more troubled nations on the union's periphery.

EU officials have been under pressure to come up with a lasting solution to the union's long-running debt crisis as market has accelerated in recent weeks. But Sarkozy and Merkel stopped short of endorsing an increase in the size of the EU's bailout fund, and were cool to the idea of a pan-European bond.

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The meeting came on the same day that Eurostat, the EU statistical agency, reported a sharp slowdown in economic growth during the second quarter.

Gross domestic product for the European Union as a whole grew at a quarterly rate of 0.2%, according to preliminary estimates from Eurostat.

It was the weakest growth rate in two years and came after a 0.8% expansion in the first three months of 2011. Economists were expecting growth to have slowed, with many projecting a 0.3% rate in the quarter.

Germany, the largest economy in Europe, nearly ground to a halt in the quarter. The nation's GDP grew at a quarterly rate of only 0.1%, down from 1.3% in the first quarter.

France, the second largest EU economy, reported last week that its economy did not grow at all in the second quarter.

Merkel and Sarkozy both sounded optimistic about the outlook for economic growth in Europe. But Merkel acknowledged that weak economic growth abroad presents a challenge for Germany's export-driven economy.

In the United States, investors were particularly disappointed that Sarkozy said the size of the 440 billion EU stability fund is sufficient, despite economists' push to greatly expand the bailout fund. Some are even calling for funding of more than 1 trillion euro.

Sarkozy also said a tax on financial transactions is a "priority" for EU policymakers.

The leaders also agreed that issuing euro bonds, a collective bond to help pay off the debt of the peripheral countries, will not solve the European debt crisis.

The weakness in Europe's economic powerhouses raises concerns about the ability of stronger EU economies to support struggling members outside the core of the European Union.

Stock markets across Europe sold off after the GDP numbers were announced. But shares recovered late in the day to close modestly lower.

The slowdown was the latest sign that global economic activity has shifted into low gear.

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On Monday, the Japanese government said GDP fell 0.3% in the second quarter. But the decline was smaller than expected, given the disruptions caused by the March earthquake.

Meanwhile, the U.S. economy grew 0.3% in the second quarter, compared with the prior quarter, according to statistics released last month. The annual growth rate for the United States was 1.3%.

In Europe, the decline in output came against a backdrop of turmoil, as the long-running debt crisis in Greece, Portugal and Ireland accelerated in the second quarter.

Investors have been rattled by fears that larger economies, including Spain and Italy, may need to be bailed out. That has raised fears about the future viability of the 12-year old currency union.

Meanwhile, political leaders in Europe have been working to contain the continent's sovereign debt problems and stabilize the euro.

The European Council announced a new €109 billion rescue package last month, and agreed to expand the powers of the EU financial stability fund.

To calm jittery financial markets, the European Central Bank began buying Spanish and Italian bonds last week. In addition, regulators imposed a temporary ban on short selling of stocks in France, Spain, Italy and Belgium.