Paris  - France and Germany agree that lowering the Value Added Tax (VAT) is not an effective response to the economic crisis, French President Nicolas Sarkozy and German Chancellor Angela Merkel said Monday.

Despite signs that a sharp economic contraction was taking hold, the two leaders also reaffirmed that they expected the European Union to hammer out an agreement this month on climate change.

"When we lower the VAT, what does that bring? Only lower prices. We think other measures, such as emphasizing innovation and research, would be more effective for our economies," Sarkozy told journalists after a meeting with German Chancellor Angela Merkel.

"It may be the right answer for other countries, such as Britain," Sarkozy said, taking note of media reports that British Prime Minister Gordon Brown was announcing a cut in VAT.

"A lower VAT is not the right solution for France and Germany," Merkel said. "We are both agreed."

Both the French and German leaders also expressed the hope that the December European Union summit would agree to concrete measures to deal with the threat posed by global warming.

"We are hopeful that we can reach our goal," said Sarkozy.

Merkel went on to say that she was sticking to her tough climate protection targets despite slumping economic growth.

The German Chancellor has faced calls from key conservative political allies in Germany to step back from her government's ambitious targets in particular as a result of the growing problems confronting the nation's key car industry.

In his successful campaign for the 2007 presidential election, Sarkozy vowed that he would convince the European Union to allow France to lower its VAT, particularly for French restaurants, where the tax is 19.6 per cent.

But Germany always vetoed the proposal in Brussels, claiming that lowering the VAT in France to the proposed 5.5 per cent would give French restaurants an unfair competitive advantage over German eateries, where VAT is 19 per cent.

Nevertheless, the French president said there was "much more agreement than disagreement" between the two sides on how to relaunch their economies.

"We acted together on the crisis. We made the same analysis," Sarkozy said.

Sarkozy said that both leaders also agreed that measures taken to relaunch the individual economies should be "appropriate to each country but coordinated" with its EU partners.

The EU Commission is expected on Wednesday to propose an economic aid programme worth 130 billion euros (165 billion dollars). Merkel noted that this amount was "not a decree (but) a reference."

She said that much can be done "without mobilizing money," such as making certain regulations more flexible for small and medium-sized enterprises.

"I totally agree," Sarkozy said.

The meeting between Sarkozy and Merkel took place on the occasion of the 10th joint cabinet meeting of the two governments.

Other issues on the agenda were the EU climate and energy package Sarkozy is trying to have adopted during France's six-month EU presidency, which ends on January
1, the passage of the Lisbon treaty and European defence issues.

Sarkozy said German and French positions on certain contentious issues in the energy and climate package were "getting closer."

"We are almost agreed on car emissions," he said.

Germany has resisted too-stringent car emission proposals for fear it would lead to job losses in its automobile industry, a point Merkel reiterated on Monday.

"We should have a climate package, but not to the detriment of employment," she said. (dpa)