BERLIN (Reuters) - Angela Merkel and David Cameron will try to resolve clashing views on the euro crisis on Friday with London accused of being selfish for opposing a tax on banks and Berlin touching off British sensitivities about transferring power to Europe.
London wanted the prime minister's visit to be low-profile, but such hopes were dashed after two lawmakers high up in Merkel's ruling party blasted euro-outsider Britain's stance in the days before the visit.
The chancellor told a congress of her Christian Democratic Union's (CDU) this week that Europe faced its "toughest hour since World War Two".
She wants to change the European Union's Lisbon Treaty to impose German-style budget discipline, preferably on all 27 members of the EU rather than just the 17 countries in the euro zone.
"Plans for a possible treaty change are now at a very interesting point and we expect to exchange views with our British partners," Peter Altmaier, chief whip of Merkel's conservatives in the Bundestag, told Reuters.
But talk of treaty change has unnerved Cameron's conservative-led coalition and touched a raw nerve in Britain about ceding more sovereignty to the European Commission in Brussels. It falls short of the "big bazooka" response Cameron has called for from Merkel.
Britain is especially worried Germany's proposals for a tax on financial transactions -- which it wants to introduce in Europe after rejection by the Group of 20 leading economies -- would hurt London's competitiveness as a financial hub.
At the CDU meeting in Leipzig, the parliamentary leader from Merkel's party Volker Kauder told delegates to rapturous applause that Germany would not accept Britain "only defending its own interests" and especially those of the City of London's financiers.
"What is England still doing in the EU?" asked top-selling German daily Bild on the morning of Cameron's visit.
The Financial Times reported that Cameron might be ready to back Merkel's plans for treaty change to create more unity in the euro zone, in exchange for safeguards for the City against any threat to its activity from European legislation.
Cameron, whose aides did not want the visit to include a news conference but ceded to the insistence of their German hosts, will restate his opposition to the Franco-German push for the so-called "Tobin tax" on banks, said the FT.
Berlin has already suggested that if non-euro countries like Britain object, the treaty changes could be limited to members of the currency bloc.
The leader of euro member Ireland, Enda Kenny, told Merkel this week Dublin would need a referendum on treaty changes, and the premier of euro outsider Denmark, Helle Thorning-Schmidt, told her Europe should "first focus on solving the crisis".
BAFFLED BY BRITS
Kauder's comment that Berlin's approach to the crisis was so widely accepted now that "Europe is speaking German all of a sudden", prompted jingoistic British headlines.
The Daily Mail wrote: "We no longer need to fear the jackboot but we have a great deal to fear from German bossy boots."
"Germany is making the running ... in a way she has not presumed to do since World War Two," the conservative Mail said.
Bild responded with the taunt: "Europe speaks German, Herr Cameron!" But Suedeutsche Zeitung chided Kauder for "further emotionalising" Britain's fraught EU debate by fuelling preconceptions about power-hungry Germans.
The British government's response was more muted.
Business Secretary Vincent Cable, from Cameron's more pro-Europe Liberal Democrat coalition partners, said Germany's stance on the transaction tax was "completely unjustified".
Cameron said in a speech this week, in an apparent response to Merkel's calls for greater political and fiscal convergence, that Europe needed "the flexibility of a network, not the rigidity of a bloc".
The conservative leader is in a quandary on the euro, realising his country's exports could be harmed by a collapse that most likely would be avoided by more unity among euro zone leaders -- however much that goes against the grain in London.
Another top lawmaker from Merkel's CDU, Michael Meister, told Reuters he was "baffled that in Great Britain there doesn't seem to be a clear view of the consequences a collapse of the euro would have for the City of London".
London fears being left out of crucial decisions regarding the European single market, which it greatly values.
With the Bank of England warning that Britain's economy will struggle to grow until mid-2012, in contrast to Germany's, it is tempting for London to deflect blame onto the euro zone.
Cameron's "big bazooka" response would involve the European Central Bank becoming the lender of last resort to prop up debt-ridden countries such as Greece and Italy - much in line with U.S. President Barack Obama's call for drastic action.
Such an infringement of the ECB's independence and its focus on price stability is completely taboo for Merkel. But she has taken a more diplomatic approach than France's Nicolas Sarkozy, who told Cameron in October: "We are sick of you criticising us."
Berlin recognises Cameron's troubles with backbenchers who voted in large numbers last month in favour of a referendum on EU membership, and the Germans recall his campaign vow that any transfer of sovereignty would be put to a referendum.
Fears that France and Italy are being sucked into the debt maelstrom have taken the two-year-old crisis to a new level in recent weeks.