David Cameron urged to sign up to 'banking union'

Brussels is urging David Cameron to sign Britain up to a European "banking union" that will form a crucial part of the plan to solve the eurozone crisis.

The European Commission is warning the UK that it would lose influence over EU-wide rules affecting the City of London unless it joins the drive towards banking union, which will be discussed at a summit of EU leaders on Thursday and Friday. Despite the warning, the UK is expected to refuse to take part.

Jose Manuel Barroso, the European Commission President, believes the UK would enjoy more influence if it joined the proposed banking co-operation agreement. There are fears in London that the 17-strong eurozone will vote en masse to impose financial-services rules on the City under the existing single market. Britain would not have a veto because decisions are taken by qualified majority voting. But Mr Cameron does not want British taxpayers to prop up eurozone banks.

Mr Cameron faces a separate row at this week's Brussels summit over EU spending levels for 2014-20.

Britain wants a freeze at a time of national budget austerity but the Commission is pushing for an increase of about 3 per cent, taking total spending to Euros 1,025bn (£820bn) over the seven-year period. It also wants a 6.8 per cent rise in 2013 to meet new commitments already agreed by member states.

There are signs that the UK is losing allies following the defeat of Nicolas Sarkozy in France. There was an unofficial deal between Mr Sarkozy and Mr Cameron that the UK would not demand radical change to the common agricultural policy if France did not push for Britain to surrender the rebate.

Mr Cameron will issue a "hands off" warning to this week's summit. But his more immediate headache will be how to protect London from being disadvantaged by the closer co-operation – seen as inevitable if the euro is to survive.