Prime Minister David Cameron and German Chancellor Angela Merkel will try to resolve clashing views on the euro zone crisis on Friday, after Berlin accused London of being selfish about Europe in comments that touched off British sensitivities about German bossiness.
The outlines of a potential deal became clearer ahead of the Berlin meeting as the Financial Times reported that Cameron would be prepared to back Merkel's plans to strengthen economic union in the eurozone, on condition he wins safeguards to protect the City of London from European legislation.
Cameron will restate his opposition to a Franco-German proposal for a so-called Tobin tax on financial transactions, which Britain believes would have a withering effect on its financial district, the FT said in an unsourced report.
A British government spokesman said he was unable to comment on the report.
Merkel is seeking limited changes to the European Union treaty to provide stricter fiscal discipline within the 17-nation euro zone, in hopes of preventing another debt crisis like the one currently spreading across the continent.
Cameron is to push for any such change to be limited to the euro zone nations, instead of the entire 27-nation bloc, which would have to ratify it, the paper said.
Citing what it said was a six-page German foreign ministry paper, the Daily Telegraph said Germany wanted to create a European Monetary Fund, which the paper said would be empowered to take financially ailing countries into receivership and run their economies.
The Telegraph quoted the document as saying the proposed treaty changes are a first stage in which the EU will develop into a political union -- something that many on the right-wing of British politics would find anathema.
The paper said Merkel would urge Cameron to rule out a popular vote on the EU in Britain in the form of a referendum strongly backed by the right wing of his Conservative party.
Limiting the effect of the treaty changes to the euro zone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK), the paper quoted the German document as saying.
The British government wanted a low profile for the eurosceptic Cameron's visit - but such hopes were dashed by two lawmakers high up in Merkel's ruling party blasting euro zone-outsider Britain's stance in the days before the visit.
Merkel told her Christian Democratic Union's (CDU) annual congress in Leipzig this week that Europe faced its toughest hour since World War Two.
She prescribes altering the European Union 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 treaty change talk seems to irritate Cameron's conservative-led coalition for two reasons: it falls far short of the big bazooka response he urges; and it touches a raw nerve about ceding more sovereignty to the European Commission in Brussels.
Britain is already worried that Germany's proposals for a tax on financial transactions - which it still wants introduced in Europe despite rejection by the Group of 20 leading economies - would hurt London's competitiveness as a financial hub.
This prompted Merkel's parliamentary leader Volker Kauder to tell the CDU in Leipzig, to rapturous applause, that Germany would not accept Britain only defending its own interests and especially those of the City of London's financiers.
His metaphorical comment that the German approach to the crisis was so widely accepted that German is being spoken in Europe prompted jingoistic British headlines such as the Daily Mail's: 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.
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.
Britain's 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.
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 replies more calmly than 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.
(Additional reporting by Stephen Brown in Berlin and Matt Falloon in London; Writing by Michael Roddy)