Tim Wallace
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BRITAIN will lose control over corporation tax and employment rules while the City will be battered by a financial transactions tax, if a new plan devised by French and German leaders gets the green light this week.

German Chancellor Merkel and French President Sarkozy outlined the controversial demands in a letter to European Council President Herman Van Rompuy, ahead of a two-day summit that begins today.

The pair are also calling for rules to enforce labour market reforms in uncompetitive European economies and for more cash to be transferred across borders to reduce imbalances.

Their call for a harmonised rate of corporation tax across the 27 countries will hit Ireland, which attracts multinational companies with its low 12.5 per cent rate, while the financial transactions tax is an attack on London.

The letter re-affirmed previous statements that “automatic” punishments would be inflicted on countries with budget deficits of over three per cent of GDP, and that the European Stability Mechanism would only need the votes of 85 per cent of countries, rather than all of them, to back its use.

Van Rompuy had hoped that new budget rules could be put in place without the need for individual countries to ratify the changes, but the proposals outlined by Sarkozy and Merkel are likely too far-reaching for that.

France’s finance minister declared that a “powerful” deal was needed to shore up confidence in the Eurozone and that French and German leaders will not leave the summit until such an agreement is made.

Their insistence on a financial transactions tax is sure to cause a major row with Britain, which opposes the levy on the grounds that London – Europe’s financial hub – would be hammered by such a move.

Meanwhile, German government officials were yesterday playing down expectations that European leaders will find a way to solve the euro debt crisis within weeks.

“A lot of protagonists have not understood how serious the situation is,” a senior German official told a pre-summit briefing. “I am more pessimistic than last week about reaching an overall deal.”

Earlier in the day, equities rose on hopes that a solution was imminent and news that a German bond auction had gone smoothly.

But markets across Europe closed down, with the FTSE off 0.39 per cent and the German Dax losing 0.57 per cent. Meanwhile Standard & Poor’s last night piled on further pressure by putting the EU’s triple-A rating on downgrade watch.