Cameron and Merkel Struggle to Compromise on EU Financial Reform

Tensions are rising in Germany and the United Kingdom due to a Friday meeting between German Chancellor Angela Merkel and British Prime Minister David Cameron. The two European Union leaders are scheduled to meet today to discuss issues surrounding the European financial crisis. Prime Minister David Cameron is particularly concerned about a proposal backed by France and Germany to create a so-called "Tobin tax" on financial transactions. Besides generating billions of dollars per year in much need tax revenue, supporters of the "Tobin tax" say that it would lead to a decrease in risky financial transactions and speculation by traders that they say are adding to the economic damage caused by Europe's sovereign debt crisis. The thinking goes that if you make it more expensive to trade, speculators will be less likely to send stock prices down and bond yields up. Prime Minister David Cameron plans to voice the United Kingdom's concerns that the "Tobin tax" is a direct threat to the City of London's status as a financial center and that the United Kingdom will bear an unreasonable share of the proposed tax burden. The British government is also concerned that introducing such a tax will simply drive financial transactions to other financial centers and cost the United Kingdom thousands of jobs and billions of dollars in annual revenue. One proposal is to have the "Tobin tax" only apply to trades that occur within countries that use the euro as their national currency. The British are wary of this proposal as well, because the French have pushed for other regulations that would require many types of eurozone financial transactions to only be allowed inside the eurozone, a move that would benefit French banks by regulating business away from their British competitors. Many British see the proposals coming out of Germany and France as a power grab. To make their point, some Euroskeptics in the United Kingdom have sunk to new lows, alluding to Germany's Nazi past in making an argument that Germany is seeking to dominate Europe. The Daily Mail wrote that "Germany has not been so powerful since 1941 when most of Europe was under her sway and her army was carving its way through the Soviet Union." The Daily Mail went on to say that Germany was responsible for the removal of two eurozone leaders, Italy's Silvio Berlusconi and Greece's George Papandreou, and that "A pro-active and confident Germany is making the running, and unashamedly so, in a way she has not presumed to do since World War II" For their part the Germans have been complaining that the United Kingdom isn't doing enough to prevent a financial meltdown from occurring in Europe, with some leading Germans asking whether or not the United Kingdom even wants to remain in the European Union. With such tensions on the rise, it will be difficult for German Chancellor Angela Merkel and British Prime Minister David Cameron to reach an agreement today that will please voters from their both their countries, while preventing the European Union's financial crisis from worsening. Investors who feel that the two European leaders will be able to come up with a deal that is mutually beneficial and reduces the risk of a European financial meltdown might want to consider the iShares S&P Europe 350 Index Fund

or the CurrencyShares Euro Trust

ETFs. On the other hand, increased European regulation over the financial sector and a tax on financial transactions could deal a direct blow to the British economy. Investors might want to consider shorting stocks like HSBC Holdings

and Barclays

if they feel that the British financial sector will suffer because of increased financial regulation in the European Union.