British Chancellor George Osborne is set for a showdown or climb-down with his EU counterparts today (15 May) as finance ministers meeting in Brussels seek to push through capital requirements proposals against opposition from the UK and Bulgaria.
At the heart of the dispute is whether countries like Britain should be allowed to enforce stricter capital rules than those agreed for at the European Union level. The issue triggered a public fallout between Osborne and his EU counterparts at a meeting of finance ministers earlier this month.
The dispute also highlights the broader struggle for influence over financial policy in a bloc shaken by the worst financial crisis in a generation. Britain has been fighting to maintain financial authority over the City of London, Europe's finance capital, as other EU members move to centralise supervision of banking and finance in Brussels and the London-based European Banking Authority (EBA).
Negotiations on the issue stalled in the early morning of 3 May, when the UK and Bulgaria rejected compromise proposals put forward by the Danish presidency, after marathon talks by finance ministers in Brussels failed to find a compromise.
Britain wants powers to raise minimum capital requirements beyond a 12% threshold (see background) – and to do so without reference to Brussels or the EBA. Meanwhile, France and other countries claim such a move would have a distorting effect on competition, and veer Europe away from much-needed central control.
UK has run out of road
The Danish presidency said it preferred “to seek the broadest possible agreement”, but would not hesitate to use EU treaty rules to push the proposal through since a qualified majority of member states was in favour.
Negotiations have been kept open by the Danish presidency, and the UK is still prepared to negotiate, claiming agreement is almost within reach. But other member states suggest the country has run out of road, leaving Osborne little option but to back down or remain out-gunned.
“It is clear that following the extreme pugnacity of George Osborne at the last meeting that there is little left to discuss, and we will move quickly to adopt the compromise from last time,” said one EU diplomat.
Britain wants to reject the proposal, claiming that the compromise blocks it from implementing recommendations for the overhaul of its banking system made by John Vickers, a former Bank of England economist. It may decide, however, to avoid another high-profile show-down with the hope that it can claw back some ground later.
The use of a qualified majority vote would be unusual and indicate frustration among member states at the UK's intransigence. Britain could seek to amend the proposal further in the legislative process, however, since a trialogue negotiation between the European Commission, Parliament and Council will follow before the proposal is agreed.
The UK for its part maintains that the compromise fails to adequately transpose rules agreed on by the Basel Committee on Banking Supervision, which the EU must implement before the end of this year.
UK, France and Germany to agree on 2013 EU budget cuts
Elsewhere, the UK is likely to agree with other countries that a European Commission proposal to increase the EU's expenditure by 6.8% during 2013 should be rejected. The UK, France and Germany, along with other net contributors, are all set to reject the Commission proposals.
Meanwhile, the European Parliament voted on the capital requirements proposal yesterday (14 May), agreeing that flexibility on bank capital should be allowed, but only with the clearance of the Commission, a condition the UK opposes.
In the same package of measures, the Parliament's economic and monetary committee voted to limit bankers' bonuses to 100% of their basic pay.
This follows calls from Internal Market Commissioner Michel Barnier for "tougher action" on bank bonuses, in the wake of an EBA report published last month.
The report – which Barnier said made for “startling reading” – found that bonuses paid to bank executives in one unnamed EU country were more than three times basic pay, and in one case a bonus of more than nine times basic pay was reported.