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Brown's stand puts Eurobond tax at risk, say EU ministers

THE EUROPEAN UNION admitted yesterday that its plans for a community- wide savings tax were in deep trouble after Britain threatened to block the measure because of fears about its impact on the Eurobond industry.

"I agree that problems are very deep and difficult," the Finnish Finance Minister, Sauli Niinistoe, current chairman of the EU finance ministers' council, said after an informal weekend meeting.

Finance ministers had hoped to push ahead with the levy at this weekend's meeting in Turku, Finland, where Britain submitted proposals aiming to exempt the London-based bond industry.

Britain fears the tax would drive the multi-billion-dollar business to centres outside the EU, wiping out thousands of jobs in London's financial district. British proposals were spurned by other countries, and the EU looked set to miss its own deadline to approve the levy at a December summit in Helsinki.

Mr Niinistoe refused to give up hope, but he said the Finnish presidency faced an uphill struggle to produce a breakthrough. "It will be a busy two, three months to try to tackle them [differences over the tax]," he said. He would not comment on what compromise seemed possible.

Britain made clear that nothing short of two alternative solutions that it presented would be good enough. It said the EU should either exclude most Eurobonds from the tax or agree a list of saving instruments that could be taxed.

"The issue for us is not when the discussions conclude and how," the Chancellor, Gordon Brown, told reporters. "The issue for us is what happens to our particular proposal, and we're insisting on that. We will not accept this directive if it damages the interests of the City and the Eurobond markets and I've made it clear that I would not back down on these issues."

His EU colleagues reacted with disappointment, saying acceptance of the proposals would be unfair to small investors.

"This [British] idea cannot be explained to our citizens," the German Finance Minister, Hans Eichel, said. "We can't go home with a deal that exempts the big investors and taxes the small ones."

The tax is the most controversial part of a long-delayed package of measures aiming to smooth out distortions in the single market. The European Commission has proposed a 20 per cent withholding tax on interest from savings and investments by non-residents to curb cross-border tax evasion by EU citizens, who hold an estimated 5 per cent of total bond holdings.

Mr Niinistoe said earlier that the British paper would be studied by experts, while Luxembourg would produce a separate proposal on protecting the mutual funds industry from the measure as well.

Diplomats say Britain will not give up its hardline position because almost all the Eurobond business is based in London. Britain doubts the EU will force non-EU financial centres, such as Zurich, to impose the EU regime on their own financial industry, which would prevent capital flight out of the EU. However, the outgoing EU tax commissioner, Mario Monti, said talks with non-EU members Switzerland and Liechtenstein had been promising.

He also said that a sudden inflow of capital to Switzerland could put unwelcome upward pressure on the Swiss franc, hurting the country's economic prospects.