The leaders of Germany and France encouraged young people to be "utopian" and dream of a European federal state with common taxation, on the eve of festivities on Tuesday (22 January) marking the 50th anniversary of the Elysee peace treaty.

"When the Elysee treaty was signed, 50 years ago, we were both eight years old. I was in East Germany at the time and who would of thought we will be here one day," German Chancellor Angela Merkel said at a townhall session with French and German students and with young soldiers on Monday evening.

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She was speaking alongside French President Francois Hollande, who travelled to the German capital with his entire government and parliament for joint festivities marking 50 years of what has become the Franco-German "engine" in EU affairs.

"The Franco-German friendship is a choice. We are not born friends, we become friends," Hollande said.

It was an allusion to his own relationship with the German chancellor, whom he casually calls "Angela" these days, despite the bad blood during his election campaign last year when Merkel openly supported his predecessor and her old ally, Nicolas Sarkozy.

Unlike the dozens of young people enrolled in Franco-German exchange programmes, neither Hollande nor Merkel speak each other's language.

"Even Angela and myself, we often speak English to one another. But don't tell anyone," Hollande joked.

Merkel added: "You are all sitting together and getting along. I envy you, as I don't speak French although I would like to, if only I wasn't so busy these days. But I think you can only understand France if you speak the language and perhaps this is true for Germany, too."

Quizzed about the state of the Erasmus exchange programme for students - which narrowly avoided closure last year because EU governments are trying to slash the Union's budget - both leaders promised the scheme is safe.

Merkel also said it should be expanded to young professionals and mentioned several times the EU job portal Eures of which few in the audience seemed to have heard about.

"Please use Eures and then write to me to tell me if it works. I didn't try it as I was not seeking for a job, and I don't know if I would have got a job in France immediately," she joked when asked by a 24-year old French woman who just finished media studies and could not find work.

Different views on economy

Despite the friendly talk, the two leaders stuck to their different views on the economy, with the Socialist government in France currently pushing for higher taxes instead of cutting wages like Germany.

"We are aware we have a competitiveness problem in France. We lost time in France while Germany pushed reforms and we need to catch up. But lowering wages or social spending is not the way, rather by giving tax exemptions to companies hiring young people, for example," Hollande said.

"We cannot simply copy the German model, in our friendship, we shouldn't mix up the countries. Each has their own specificity, their own strengths," he added.

Merkel said she has no intention of copying the French model by raising taxes for the rich.

"I won't take up one element and apply it here. What is important is to have justice in the tax system. Here in Germany, ten percent of the highest earners pay 50 percent of the entire tax income. So we think our system is fair and we don't want to change it," she explained.

Hollande noted that his recent 75-perecnt-tax on millonaires is all about fairness.

But he added: I am aware we are in an open society, where capital flows and people get away," in reference to French actor Gerard Depardieu who recently got Russian citizenship to avoid paying the tax.

They both agreed that EU taxes should be harmonised in the long run, however.

When asked if it is "utopian" to think that one day there would be a federal EU state, Hollande said that the EU as it is today seemed "utopian" 50 years ago.

"I accepted that we need to converge towards common budgetary policies. We need to have a similar discussions about taxes, for instance a common CO2 tax. It's true there are political risks, but we need to embrace our common destiny," he said.

Merkel named Ireland, Malta and Cyprus as low-corporate tax havens: "I don't want to make a statement now that my fellow EU leaders will be upset about, but step by step we'll need to establish margins and then each country will have to choose how it fits in those margins. Your utopia is totally right."