September 13, 2012 10:04 pm

Chancellor to back City in EU talks

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Chancellor George Osborne leaves 11 Downing Street©Getty

The chancellor Geroge Osborne admitted the country had 'deep-rooted economic problems'

George Osborne on Thursday night flew into Cyprus vowing to defend City interests in the face of a eurozone banking union, in the first of a series of EU negotiations that could strain Tory and coalition unity in the run-up to the next election.

The chancellor supports most of the banking union plan, which hands supervision in the eurozone to the European Central Bank, but fears there are insufficient safeguards to protect the single market and the power of the Bank of England.

Mr Osborne believes the current proposals could tilt the balance of regulatory power against Britain, with the ECB holding a dominant position as the EU coordinates financial rules, so that its interpretation is imposed on the UK.

The chancellor is confident of securing the safeguards he seeks and Treasury officials do not expect a bust-up during finance ministers’ talks in Nicosia, capital of Cyprus, which holds the rotating EU presidency.

But even the most technical of negotiations in faraway capitals stir Tory passions at Westminster, and Downing Street officials believe Europe could explode again as an issue before the 2015 election. “It’s definitely bubbling away,” said one.

On the proposed banking union, Mark Field, Tory MP for the City, said: “I am concerned that David Cameron and George Osborne need to do a lot more to protect the interests of the City of London.”

Douglas Carswell, a leading Tory eurosceptic, said ministers had lost their nerve after David Cameron deployed his “veto” over a new EU fiscal pact in December 2011 and the prime minister and Mr Osborne were “more integrationist than their Labour predecessors.”

Jacob Rees-Mogg, another Tory backbencher, claimed banking union could end up imposing the same capital ratios on British banks as those in force in other parts of the EU in different stages of the economic cycle.

While Downing Street expects to be able to contain any fallout from the banking union negotiations, Jose Manuel Barroso, European Commission president, this week raised further Tory concerns when he proposed a new EU treaty to help Europe evolve into “a federation of nation states”.

David Lidington, Europe minister, said much depended on Germany’s insistence on a treaty to cement the eurozone’s fiscal rules and whether there was appetite for a wider treaty on “political union” – for example merging the posts of EU president and European Commission president.

Britain would have to ratify the treaty – even if it did not transfer new powers to Brussels – reviving Tory calls for an EU referendum. Ministers hope any treaty would be so long in preparation that it could be pushed beyond the 2015 election.

Mr Lidington said he welcomed aspects of Mr Barroso’s speech on economic reform and also his assertion that not all countries would have to join the closer union: “It would be wrong to see it as a declaration of war on the British position.”

Mats Persson, director of the Open Europe think tank, says further tension could arise over the next EU budget – covering the period from 2014-20 – if other member states reject Britain’s call for a seven-year real terms freeze.

He also points to the highly contentious question of whether Britain should take its one-off chance to withdraw from 130 EU crime and policing rules – including the European arrest warrant – before they are formally enforced in 2014.

On each of these issues, tensions between the pro-European Liberal Democrats and the Conservatives are likely – as well as another round of Tory party management problems for Mr Cameron.

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