Osborne backs levy but wants to keep the money

George Osborne, the Chancellor, yesterday said that national governments must have control over how to spend the proceeds of a Europe-wide bank levy.

Mr Osborne used a joint press conference with the US Treasury Secretary, Tim Geithner, to spell out Britain's opposition to the proposals by the internal markets commissioner, Michel Barnier, which would make the proceeds of such a levy available to rescue troubled banks across the continent. Mr Osborne said: "The Conservative Party made an argument at the recent general election that the United Kingdom should have a bank levy.

"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 that can help – it will be used for general expenditure purposes."

Concern has been expressed in Britain about the "moral hazard" of such a fund, with critics fearful that it would serve to encourage banks to take undue risks.

The issue could serve to be the first major confrontation between Mr Osborne and his European colleagues if Mr Barnier insists that the levy revenues be made available to all.

At the conference Mr Geithner called for swift action to reassure markets on Europe's mounting debt crisis. He said a €750bn (£640bn) fund to prop up the continent's debt-ridden countries was "a good programme" and had "the right elements" but he also said that implementation needs to begin to start calming markets.

"What markets want to see is action," said Mr Geithner.

The money, provided by the International Monetary Fund and the European Commission, aims to aid eurozone governments if they have difficulty raising debt from capital markets. It was started because of worries that Greece might default on its debt.

Mr Geithner and US officials have become alarmed at the way contagion from the Greek crisis has spread so rapidly and sparked fears of a fresh global financial and banking crisis as countries such as other debt-ridden eurozone members such as Portugal and Spain have been getting sucked in. After the talks with Mr Osborne met with the Bank of England Governor, Mervyn King, before travelling to Frankfurt for dinner with the European Central Bank president, Jean-Claude Trichet.

Today he heads to Berlin for further talks with the German Finance Minister, Wolfgang Schäuble. The US has been concerned by Germany's surprise decision to go it alone in banning some types of speculative trading such as "naked" short selling of shares in leading banks. It sees the ban, which sparked sharp falls in world stock markets after it was introduced, as counter-productive.

Despite Mr Geithner's words, the single currency continued to fall yesterday. It was the third day in a row that the single currency has fallen against the dollar. By 5pm UK time – midday New York trading – the euro had fallen by 1.1 per cent against the dollar to $1.2225, although during trading it had traded as low as $1.2191. Sterling also gained ground against the euro, hitting a two-week high, but it fell against the dollar.

Mr Geithner said he was not concerned about Britain's move to cut spending to tackle its fiscal deficit having a negative impact on its economy. He described the deficit-cutting measures already set out by the Government a "compelling fiscal plan". He added that Britain has managed to get the right balance "between tackling the deficit and encouraging growth". Further spending cuts are expected in Mr Osborne's emergency Budget on 22 June.

Where they stand...

European Union

Bank Levy Wants a levy imposed on banks, with the funds set aside to pay for future crises, on "polluter pays" principle.

Regulation Wants co-ordinated action, but critics accuse it of trying to centralise regulation in Brussels. Rapped Berlin over recent unilateral ban on naked short selling of some bonds and stocks.

Hedge Funds A draft directive would require a "passport" style system to govern fund managers wanting to sell their products in the EU.

Fiscal plans Eurozone countries have been queuing up to outline austerity plans. Italy yesterday gained a gold star from Brussels as it unveiled €24bn cuts.

United Kingdom

Bank Levy Supports the principle of a bank levy but, along with France, wants the money to cut its budget deficit.

Regulation Is handing bank regulation back to the Bank of England. Has clashed with US over FSA moves to get overseas banks to keep more cash in UK.

Hedge Funds With about 80 per cent of European funds based in London, and the fund industry in the Channel Islands outside the EU, the UK has been vocal about its concerns over Brussels' plans.

Austerity Unveiled £6bn cuts in public spending earlier this week. More drastic cuts are expected this autumn.

UNITED STATES

Bank Levy Wants to recoup the cost of support for banks at the height of the financial crisis via fees imposed on large financial groups for next 10 years.

Regulation Passed a sweeping reform bill earlier this month that will ratchet up regulators' powers and could stop banks' proprietary trading. Derivative contracts will also will have to be cleared through third parties.

Hedge Funds The US has condemned the EU's plans as protectionist. Its financial reform bill requires hedge funds to register with the SEC and provide information about their trades and portfolios.

Austerity Has set up a cross-party panel to draft ideas on how to cut the country's €1.4 trillion deficit. States have also drastically slashed budgets.