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Osborne refuses to back EU levy

POLITICAL EDITOR

GEORGE Osborne embarked on a collision course with Brussels yesterday, after he refused to back the creation of a fund to pay for the winding down of failed banks.

EU internal market commissioner Michel Barnier said member states should use the proceeds from a new bank levy to fund the “orderly failure” of troubled institutions.

But while the chancellor backs a levy on banks, he wants to use the funds to help reduce Britain’s yawning £156bn Budget deficit.

“The Conservative Party made an argument at the recent general election that the UK should have a bank levy,” Osborne said.

“We are glad to see elsewhere in Europe others agree and we are clear that the purpose of that bank levy is to raise money for general expenditure purposes.”

A Treasury aide said Osborne thought “ring-fencing” some of the proceeds to help stricken banks would only “encourage risk-taking”.

“If a systemically important institution knows that the government is sitting on ‘x’ billion pounds then that might encourage it to be less risk averse,” he said.

He added: “Of course, it does go into the coffers. It helps pay down the deficit.”

However, as Barnier is advocating a fund that pays to wind-down troubled banks rather than bail them out, it is unclear how it would make them act less responsibly.

Barnier said his proposal would force banks to “contribute to a fund to manage bank failure, protect financial stability and limit contagion”.

He added: “It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector.”

Treasury sources said Osborne’s decision to forge ahead with his own plans for a bank levy was another example of Britain’s new firm but amicable relationship with the EU.

“We’re not shooting this down aggressively – but we are being firm about what we think,” said one.

Barnier thinks he can impose his plans on member states if they are agreed by a qualified majority vote. But the Treasury said fiscal issues were a matter for individual countries.

“This is a matter for us – it looks and smells like a tax,” said one official.

France also voiced its opposition to Barnier’s proposals, citing similar concerns to Osborne. But German finance minister Wolfgang Schauble believes the plans are moving in the “right direction”.

Meanwhile, US Treasury secretary Timothy Geithner backed Osborne’s plans to start cutting the deficit now.

“The chancellor has laid out a strong compelling direction... I think he has the right balance,” he said.