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By Bob Duncan
The UK has found itself isolated in Europe again after Chancellor George Osborne refused to back a plan to limit banker's bonuses despite it having been agreed by the finance ministers of every other EU member state.
The EU proposes to limit bonuses to 100% of bankers' annual salary, or to 200% with explicit shareholder approval. Further talks will take place, but all countries have already accepted the plan with the exception of the UK.
A formal vote will follow in a few weeks, and will be passed with a qualified majority of 2/3 of members. This means that, while the UK may try to gain concessions during negotiations, it has no veto on the result.
Following the meeting, chancellor George Osborne argued that the UK already had Europe's toughest regime for banker's pay and that a cap could “have a perverse effect”.
German Finance Minister Wolfgang Schaeuble said at Tuesday's meeting that “it would be better” to reach a consensus with the UK, but EU officials say that there is little scope for the UK to alter the agreement significantly.
It is almost unprecedented for the UK, which has several major financial centres including the city of London, not to back EU financial legislation.
Simon Lewis, chief executive of the lobby group the Association for Financial Markets in Europe, said the proposed measures were not just a threat to the City of London, but to Europe's competitive position in financial services.
He told the BBC: "If this goes ahead, you will see the law of unintended consequences. Salaries will go up, there will be less flexibility, and the banks will be less competitive."
London Mayor Boris Johnson agreed with Lewis, dismissing the bonus cap as "self-defeating", saying it would at best provide "a boost for Zurich and Singapore and New York at the expense of a struggling EU.
"This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire," claimed Mr Johnson, adding that the decision was likely to further strain the relationship between the UK and Brussels.
According to the BBC, there has been speculation that the UK may try to block a bonus cap by invoking the little-used "Luxembourg Compromise", a defence which allows a member state to block a majority decision being taken if an issue is deemed to seriously affect "a very important national interest".
There are also reports that some banks are taking legal advice to see if they can have the proposed cap ruled unlawful, but the European Commission has said that it is confident the proposals are legally watertight.
The bonus proposals form part of a basket of measures requiring banks to strengthen their capital buffers, which the EU has adopted in the hope of avoiding another financial crisis.
Many voters and political leaders on the Continent - as well as many economists in the UK - blame excessive bonuses in the financial sector for encouraging the risky behaviour that led to the 2008 financial crisis.
Michel Barnier, the EU commissioner for the single market, claimed high bonuses were the reason for excessive risk-taking by bankers. He said: "Enough is enough. We've got to put a stop to that."
Shadow chancellor Ed Balls said it was "no wonder" that George Osborne found himself outvoted 26-to-1. "He failed to engage with these sensible proposals to limit bonuses... until the very last minute.
"It shouldn't take the European Union to rein in excessive bonuses, but George Osborne has dragged his feet and refused to act in Britain."
Arlene McCarthy, British MEP for the Labour Party and Vice President of the Economic and Monetary affairs Committee said:
"These rules are designed to make banks safer, more accountable, and to ensure they focus on lending to the real economy.
"It will put an end to an unsustainable banking model, where bailed-out banks with £5.2bn losses, £1.1bn fines for mis-selling, £390m fines for Libor-fixing, were still in 2012 paying over £600m in bonuses.
"This is neither ethnical nor sustainable. The industry has had two years to sort this out, and their failure to tackle the culture has resulted in these tough rules.
"It's a shame that the UK government has sought to defend this broken bonus culture by acting as the trade union for a minority of highly paid traders."