Sarkozy, Merkel in emergency meeting

French President Nicolas Sarkozy called a eurozone crisis meeting with his German counterpart while Italy promised cuts and tax hikes Thursday as its part in the battle to save the single currency.Merkel will travel next Tuesday to Paris for the meeting aimed at producing "joint proposals" by September on how to better manage the euro and avoid future instability, Sarkozy's office said.The announcement came as financial markets were again in turmoil on concerns that the US and eurozone debt crisis may spark a new recession and after rumours of a France credit rating downgrade and fears over Greek debt exposure.Markets are wondering whether France and Germany -- the eurozone's two biggest economies -- can continue to underwrite other states' debts without losing their top credit ratings and falling victim to the crisis themselves. The crisis started in Greece and is now fuelled by fears that Spain or Italy might default on their debt and possibly spark a break-up of the currency shared by 17 countries. Italy promised Thursday to meet many of the demands made by European Central Bank for major economic reforms in return for help in shielding the country from the debt crisis. "We need to have very strong austerity measures in 2012 and 2013," Finance Minister Giulio Tremonti told lawmakers, who had been called back from summer holidays to debate the moves.Italy must speed up austerity measures -- with the aim of achieving budget balance by 2013 instead of 2014 as previously planned -- "because of the intensification of the crisis and indications from Europe," Tremonti said. He outlined plans to raise taxes on investments and cut welfare but was thin on details and signalled Italy would not fulfil some key ECB demands, such as cutting public sector salaries and easing the firing of employees.The ECB this week began a massive intervention on the Italian and Spanish government bond markets in an attempt to reassure investors that the eurozone's third and fourth largest economies will not be dragged into a debt spiral. Paris is also working on new budget measures to be announced by the end of the month, after President Nicolas Sarkozy interrupted a holiday on the Riviera on Wednesday to fly back to Paris for an emergency government meeting on debt.Sarkozy's intervention came as his ministers battled to head off speculation that France would be the next country to lose its top AAA status after the United States was stripped of the prized credit rating last week. Stock markets around the world see-sawed again Thursday as investors struggled with weak economies on both sides of the Atlantic and worries over the health of top eurozone countries."This isn't a volatile equity market. It is an extremely volatile equity market," said Patrick O'Hare of Briefing.com. "The massive swings are symptomatic of a market that is racked with uncertainty."French banking shares in particular were battered by fears over their exposure to the troubled debt of Greece, Ireland and Portugal, despite a statement from the central bank insisting there was nothing to worry about. The lenders saw billions of euros wiped off their market value but by the end of the day European markets had rebounded by some three to four percent. Eurozone member Cyprus has meanwhile unveiled tax hike proposals to trim its fiscal gap, but Fitch Ratings downgraded it by two notches and said it will likely need an EU bailout. European Central Bank chief Jean-Claude Trichet warned Wednesday that Europe was facing "the worst crisis since the Second World War" and said his bank had been "extremely clear" with governments on what actions need to be taken.Economists suggested that the ECB was now dictating terms to eurozone governments in exchange for controversial aid that only it can provide at short notice. EU leaders are trying to implement a July agreement aimed at beefing up the euro's defences. But many of the measures need national parliamentary approval and that process could drag on to the end of the year in some cases.Leaders agreed at the summit on the conditions of a second bailout for Greece as well as an increase in the eurozone's rescue fund, the 440-billion-euro ($625-billion) European Financial Stability Facility.