The Government has conceded one of its vital "red lines" in the agreement to set up new pan-European financial supervisory bodies – and lost its veto on paying for any future European banking rescue.
British ministers have long insisted that "fiscal responsibility" for European banking rescues should be "aligned" with national supervision, because national governments usually pay for such episodes.
Yet the amended text of the latest EU agreement, released yesterday, offers much "wriggle room" for a determined European regulator to defy a national government. The text states that disputes over paying for rescues will be reached by simple majority voting, thus depriving the UK of a final right of veto.
Although the text of the agreement reached at Wednesday's meeting of European finance ministers, including the Chancellor Alistair Darling, states boldly that the new overarching European supervisory authority "shall ensure that no decision... impinges in any way on the fiscal responsibilities of member states", it also offers only limited resistance in cases where a national government and the European regulator clash.
A series of appeals are set out involving delays of up to three months, itself an impractical procedure during financial crisis, and requires both sides to present arguments. However, New Article 23 of the document leaves open the possibility that a majority of EU finance ministers and the EU regulator could force the UK taxpayer to foot the bill for the bailout of a European institution.
Angela Knight, of the British Bankers' Association, expressed hostility, saying: "We are keen to see more harmonious supervision and to work towards a common rule book. But if a national government has to stand behind a financial institution then that has to be a national responsibility."
Earlier this year, Mr Darling said: "Responsibility for managing the resolution of financial crises – including fiscal support – remains an important consideration in designing supervisory and regulatory structures. Supervisory authority needs to be aligned with fiscal responsibility."
Yet the new directive also states that the European Banking Authority "shall actively facilitate and, where deemed necessary, coordinate any actions undertaken by the relevant national competent supervisory authorities" in the case of "adverse developments which may seriously jeopardise the orderly functioning and integrity of financial markets or the stability of the financial system in the European Union". The loss of a final say over European banking bailouts comes at the end of a difficult week, in which the reappointment of a Frenchman to the important position of European commissioner for the internal market prompted the French President Nicholas Sarkozy to declare: "I want the world to see the victory of the European model, which has nothing to do with the excesses of financial capitalism".
Three bodies will come into force, based in London, Paris and Frankfurt: the advisory European Systemic Risk Board, on which the Governor of the Bank of England, Mervyn King, could play a key role; the European Banking Authority; the European Insurance and Occupational Pensions Authority; and the European Securities and Markets Authority.
National supervisors such as the FSA will retain day-to-day oversight; but the European bodies will seek "harmonisation", "ensure a common supervisory culture and consistent supervisory practices and "ensure a coordinated response in crisis situations". Many in London fear heavier regulation will push businesses away.