EU warns Britain: financial rules apply to you too

Commissioner Olli Rehn says City of London will still be subject to regulation from Brussels

guardian.co.uk, Ian Traynor, Monday 12 December 2011

Olli Rehn: 'The UK’s excessive deficit and debt will be the subject of
 surveillance like other [EU] member states.' Photograph: Yves Herman/Reuters

The European commission on Monday underlined the negative impact of David Cameron's summit gambit by pledging that the City's financial institutions would be subject to new regulations hatched in Brussels.

Emphasising the EU's determination to dismiss Cameron's abortive attempt to secure exemptions for the City, Olli Rehn, the commission vice-president in charge of economic and monetary affairs, was scathing about the prime minister's campaign. This was rejected by the Brussels summit on Friday, triggering a British veto of German plans to anchor a new eurozone fiscal union in a renegotiated Lisbon treaty.

Cameron's move isolated Britain in Europe as seldom before, producing weekend headlines and comment across Europe that the UK was on the way out of the EU.

"We want a strong and constructive Britain in Europe, and we want Britain to be at the centre of Europe, and not on the sidelines," said Rehn, sounding more sorrowful than angry at what is seen in Brussels as Cameron's self-inflicted wound. "If [Cameron's] move was intended to prevent bankers and financial corporations in the [City of London] from being regulated, that is not going to happen. We must all draw lessons from the financial crisis, and that goes for the financial sector as well."

Launching a new set of economic convergence policies – known as the "six-pack" and which come into force on Tuesday – Rehn admitted that Britain's blocking of attempts to reopen the Lisbon treaty could create problems for the EU. Potentially, the move makes it legally more difficult to establish the eurozone's "fiscal compact" – the main result of last Friday's summit – by March.

Because of the British block, at least 23 and possibly 26 of the 27 EU states are now to agree a new international treaty among themselves as the answer to the eurozone debt crisis. The aim is for all eurozone countries to enact laws setting binding debt ceilings and with quasi-automatic penalties and fines for those countries breaking the rules. Germany, the architect of the new regime, wants to strengthen the key European institutions – the European commission and the European court of justice – giving them formidable powers of intervention in enforcing the new regime.

But on the central innovation – automatic fines for deficit sinners – Rehn conceded that it could be difficult to give the new regime as much clout as Berlin would like. The Germans want the commission to enforce the regime independently by recommending punishments for eurozone countries running excessive budget deficits. The penalty would be triggered automatically unless a qualified majority of eurozone governments then voted to overturn it. Rehn said the Lisbon treaty would need to be changed for this to happen – but it cannot be changed because of the British veto on Friday.

While eurosceptic Tory backbenchers may be pleased by the potential legal stalemate, the Cameron veto may be generating more unintended consequences. For months it has been British government policy to back EU efforts to stabilise the euro through an effective fiscal union. Cameron and the chancellor, George Osborne, have been stressing the "relentless logic" of fiscal union, supporting it strongly provided that Britain is not involved. Britain's veto and its resistance to having EU bodies involved in policing the fiscal compact could leave the new regime weaker, setting back attempts to stabilise the euro, which Britain says is also crucial for the UK economy.

"I regret very much that the UK was not willing to join the new fiscal compact, as much for the sake of Europe and its crisis response as for the sake of British citizens and their perspectives," said Rehn. "I would also like to remind you that the UK government has also supported and approved the six-pack of new rules tightening fiscal and economic surveillance, which enters into force tomorrow.

"The UK's excessive deficit and debt will be the subject of surveillance like other member states, even if the enforcement mechanism mostly applies to the euro area member states."

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