David Cameron and George Osborne will today begin a rearguard action to stop the City of London's status as the world's leading financial centre being threatened by plans for banking union inside the eurozone.
Although Britain will not join the banking union, the 17 countries in the euro will form a powerful bloc which could determine rules for the financial sector under the EU's single market. There are growing fears that the 17 will favour Paris and Frankfurt at London's expense.
In a report published today, an all-party House of Lords committee urges the Government to "go into battle" to protect London's "premier position" in Europe and the world. It warns that banking integration in the eurozone poses a significant threat to the single market.
Mr Osborne will discuss the banking plans with EU finance ministers today, before Mr Cameron seeks safeguards for the City at a two-day summit of EU leaders starting tomorrow.
A crunch issue for Britain is the voting power that the 10 non-euro members should enjoy on the London-based European Banking Authority (EBA), which harmonises rules across the EU. Its role could be expanded under banking union, making it easier for Britain to be overruled on regulations affecting the City.
Eight of the 10 "outs" want to join the euro, with only the UK and Denmark determined to stay out. Some EU countries are accusing Britain of demanding a "one-country veto" over banking decisions affecting the all 27 member states.
Britain rejects that charge, but is unhappy about the latest proposal on voting rights by Herman van Rompuy, president of the European Council, which is made up of the 27 EU leaders. It suggests that EBA decisions would be taken by a qualified majority, rather than requiring unanimity among the 27, but also need a simple majority of both the 17 euro "ins" and the 10 "outs". Britain, Denmark, Sweden, Poland, the Czech Republic and Lithuania want the voting bar set higher. But Germany, France, Spain, Belgium, Luxembourg and Austria say non-euro countries should have less power.
Today's report from the Lords EU sub-committee on economic affairs proposes that voting strength on the EBA reflect the size of member states' financial sector, which would boost the UK's clout. But Germany and other EU nations are likely to oppose that.
Lord Harrison, the Labour peer who chairs the sub-committee, said: "It is vital the UK Government get the negotiations right so that the banking union does not undermine the single market as a whole and the single market in financial service in particular, which is so vital to the UK and the City of London. And it must not threaten the position of the UK and other countries who choose to remain outside of the European banking union."