The leaders of Europe’s two powerhouse economies presented a plan to save the euro and foster more coordinated economic policy across the euro zone yesterday.  Markets reacted with an exasperated yawn.

U.S. stocks fell for the first time in four days and European banking and exchange shares went south after German Chancellor Angela Merkel and French President Nicolas Sarkozy announced, as part of their plan to keep their shared currency afloat, a proposal to tax financial transactions. The tax—only one part of the leaders’ plan—was originally rejected by the European Union last year and would likely hit banks and exchanges by curbing trading volume. Their proposal would seek to apply the tax to the whole EU, rather than just the 17 euro zone states.

The goal of the tax would be to shore up lagging revenue due to nearly non-existent economic growth.  The Merkel-Sarkozy plan was announced just on the heels of data indicating that Germany’s economy had slowed to a halt in the second quarter of 2011, with a 0.1% growth rate for the continent’s largest economy.

Investors were quick to voice their opposition to the tax, which the Association for Finance Markets in Europe (AFME) argued would do more harm than good.  “The financial services industry should not be seen as an additional source of tax revenue but as an essential part of at stable and sustainable economy,” said Simon Lewis, AFME chief executive. “The real impact of a possible transaction tax needs to be understood. Many financial transactions are carried out on behalf of businesses that would bear the cost of the additional tax. For example, the foreign exchange market underpins the international trade and a tax on these currency trades would increase costs for a large section of European industry, to the detriment of economic growth.”

Markets had hoped that the meeting between the two heads of state would lead to the creation of a bond backed by the entire euro zone—a safe-enough investment that would ultimately reduce borrowing costs for struggling European nations. Merkel and Sarkozy rejected the plan, however, on the grounds that the bond would let countries like Greece continue to behave irresponsibly and spend without regard for the EU as a whole. Sarkozy did note that a euro bond could be possible in the future, but that there’s nothing to justify its creation right now.

Merkel and Sarkozy also rejected markets’ other big hope for the meeting, which was an expansion of the 440 billion euro rescue fund. In addition to the financial transaction tax, they also proposed that debt limits be written into national law and that a euro council be established, headed by EU President Herman van Rompuy, to create a continent-wide “economic government.”

Jacob Barron, NACM staff writer