“What we want to do is provoke a shock, to set an example,” Sarkozy said late yesterday on French television from Paris. “There’s no reason why deregulated finance, which brought us to the current situation, can’t participate in the restoration of our accounts.”

A France-only levy is opposed by the country’s financial community and its feasibility has been questioned by the Bank of France. It has become a political challenge for the president, who faces elections in a two-round vote in April and May and wants to make good on a pledge he made to impose such a tax when France last year held the presidency of both the G-8 and G-20 group of countries.

The European Commission in September suggested a tax of 0.1 percent on equity and bond transactions and 0.01 percent on derivatives, which it said could raise 55 billion euros ($71 billion) a year. European Union finance ministers are due to discuss the levy in March.

The French government, long a proponent of the tax, stepped up its campaign this month, saying it would impose the levy even if others didn’t. Sarkozy said yesterday that his government has found a way to tax transactions related to France even if they happen elsewhere, pointing to trades in credit default swaps as an example. He didn’t give further details.

Negative Effect

Sarkozy said he expects revenue of 1 billion euros from the transaction tax “that will go toward cutting the deficit.”

“CDSs, which are speculative instruments against sovereign debt, will be taxed and online speculative purchases will be taxed,” he said.

The tax will apply to share purchases, including high frequency trading, and CDS transactions. Unlike the European Commission proposal, it will not apply to bond trading.

Ernst & Young, an accounting company, has said in a report that while an EU transaction tax itself may raise as much as 37 billion euros, its net effect could be negative by between 2 billion euros and 116 billion euros by decreasing economic activity and reducing revenue from other taxes.

The U.S. opposes taxes on transactions, preferring bank levies based on the size of their balance sheets.

The U.K., home to Europe’s biggest financial center, has also opposed the tax as it is currently proposed. Prime Minister David Cameron said Jan. 26 that a Europe-wide transaction tax would be “madness,” saying it would cost 500,000 jobs.

Stamp Duty

Germany is considering a plan for a form of European stamp duty on shares linked to tougher trading rules as an alternative to a financial-transaction tax, in an effort to win over the U.K. to adopting European Union-wide levy.

Investors buying U.K. shares pay a tax of 0.5 percent on the price. The stamp duty is also levied on options to buy shares and rights arising from shares. It is not levied on foreign shares. Stamp duty on shares raised 3 billion pounds ($4.7 billion) in the year to April 2010, according to the government.

German Chancellor Angela Merkel’s Christian Democrats and their Free Democratic Party allies may be coalescing around an FDP proposal for a Europe-wide tax along the lines of the U.K.’s levy on shares. Such a solution is a “good option” if accompanied by rules that limit “abusive excesses” in automated trading, the Free Democrats have said in a paper drafted by former Economy Minister Rainer Bruederle.

The French financial industry has spoken out against imposing a transaction tax unilaterally in France.

“A tax that’s limited to France would weigh on growth, lead to a loss of competitiveness, and create a heavy handicap for the financing of the French economy,” the French Banking Federation said in a statement Jan. 9.

To contact the reporter on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net Mark Deen at markdeen@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net James Hertling in Brussels at jhertling@bloomberg.net

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