European markets hit by eurozone Robin Hood tax plans

Stock exchange shares and main indices lose ground as German chancellor Angela Merkel and French president Nicolas Sarkozy propose new financial transaction tax.

European exchanges would all be affected if traders were forced to pay a small fee every time they bought and sold stocks or currencies. Photograph: Alastair Grant/AP

Plans for a new Robin Hood-style tax on financial dealings hit shares in stock exchange operators on Wednesday, as the financial markets balked at the latest proposals to rescue the eurozone.

The prospect of tax rate harmonisation and a new financial transaction tax, as pledged by German chancellor Angela Merkel and French president Nicolas Sarkozy, did not ease fears over the stability of the region. The FTSE 100 fell 77 points in early trading to 5279, with other European markets also losing ground.

Shares in the FTSE 250-listed London Stock Exchange fell by 6% at the start of trading, with Germany's Deutsche Bourse and pan-European exchange NYSE Euronext suffering similar falls. The three exchanges would all be affected if traders were forced to pay a small fee every time they bought and sold stocks or currencies.

Sarkozy and Merkel pledged to create a "true European economic government" following their mini-summit in Paris on Tuesday. As well as a transaction tax, the pair agreed to harmonise taxes across their two countries and push for tougher deficit reduction across the eurozone.

Eurobonds, though, remained off-limits – to the disappointment of some analysts who believe that European countries must combine their borrowing needs to get through the turbulent financial markets.

Michael Hewson, market analyst at CMC Markets, said the measures announced in Paris were "all profoundly disappointing".

"The tax harmonisation plan will not go down well with other European Union countries, particularly Ireland where it has been a red line issue. There was no talk about boosting the European Financial Stability Fund and no talk about euro bonds, all rather disappointing, but not altogether surprising, given the political obstacles against them," said Hewson. "The main concern is about where future growth will come from, if Germany as the main heartbeat and cash generator of Europe catches a cold," he added.

GDP data released on Tuesday showed that the German economy barely grew in the second quarter of 2011.

Tax expert Richard Murphy welcomed the commitment to a transaction tax, calling it "a welcome and overdue move that needs replication way beyond the eurozone if the feral banking economy is to be brought under control".

Irish finance minister Michael Noonan said that any such tax should be imposed across the EU rather than just the eurozone. He also argued that the Franco-German plan to harmonise their corporation tax levels would not affect Ireland's current rate of just 12.5%.

Swiss franc in demand

Investors continued to flock to safe havens such as the Swiss franc, which gained 2% against the euro despite the Swiss Central Bank pledging to take steps to lower the currency's value.

Jane Foley, senior currency strategist at Rabobank, said the markets should have learned that the eurozone crisis will not be solved quickly, particularly as domestic political pressure prevents Merkel from moving swiftly into full fiscal union across the zone.

"Chancellor Merkel remains tied down by moral hazard. Even if she recognises that significant fiscal integration will be needed to save European monetary union she cannot openly admit this at this point," said Foley.