Merkel and Sarkozy to hold talks later

The leaders of Germany and France are holding their first meeting of the year as the eurozone continues attempts to hammer out a treaty enshrining tougher budget rules.

The talks between Chancellor Angela Merkel and President Nicolas Sarkozy come ahead of new Italian Premier Mario Monti’s first visit to Berlin on Wednesday.

Mrs Merkel and Mr Sarkozy will travel to Italy on January 20 before a European summit at the end of the month.

Italy is a key focus of the crisis because of its size, huge debt load and need to borrow heavily in the first quarter. The yield on its 10-year bonds rose back above the 7% level that is considered a danger mark late last week.

Meanwhile, Greece’s prime minister has warned of possible default if details of a second bailout are not finalised.

Germany's finance minister jas pushed countries that use the euro to follow up on deficit-cutting pledges, saying that efforts to tackle Greece's problems ``could go faster''.

Germany has insisted on austerity measures in the eurozone’s fight to lower budget deficits and regain investor confidence.

“The countries that have problems with overly high deficits must credibly reduce their deficits; the competitiveness of all economies must be strengthened,” Wolfgang Schaeuble said.

“The European currency needs a fiscal union so that all countries are guaranteed to keep to the agreed rules,” he added. “And if that happens, then the rescue funds we have agreed on will suffice.”

Mrs Merkel’s spokesman said promoting growth and employment would be key issues at the meeting. However Mr Schaeuble focused heavily on Germany’s push to tackle “the causes that led to the crisis.”

“That goes in particular for Greece – Greece must implement what has been agreed; all the rescue funds in the world won’t help if the causes aren’t tackled credibly,” he said.

Greek Prime Minister Lucas Papademos has warned union leaders and business groups that decisions made in the next few weeks, ahead of a new visit by international debt inspectors, will determine whether Greece remains in the 17-nation eurozone.