German Chancellor Angela Merkel backed plans for a European Monetary Fund at a meeting with Jean-Claude Juncker, head of the euro zone, in Luxembourg on Tuesday.

Merkel and Juncker discussed the proposed plan to set up a European Monetary Fund similar to the International Monetary Fund, intended to help countries deeply in debt get back on track.

Merkel stressed, however, that a series of sanctions would first have to considered, to prevent countries from building up their debts in the first place. She hinted at possible penalties, including the temporary removal of a country's voting rights in the European Council.

Both Merkel and Juncker cautioned that such a fund was not intended for Greece. "This is a plan for the future," said Merkel.

Curb trading of credit default swaps

Also on Tuesday, Germany and France announced plans to set out proposals to curb or ban financial market speculation, according to a government spokesman in Berlin.

Merkel and French President Nicolas Sarkozy will write a joint letter to European Commission President Jose Manuel Barroso outlining their proposals.

These include plans to regulate speculation against falling company share prices or loan losses and guards against speculating against the threatened bankruptcies of entire countries, including the trading of credit default swaps. Luxembourg and Greece also lent their support for the latter initiative.

"We all agree that we need to prevent financial speculation," said Merkel.

"We believe that the persistent speculation against the euro zone countries gives cause to quickly implement these proposals," she added, referring to the recent financial troubles of Greece.

cmk/AFP/dpa
Editor: Andreas Illmer