Osborne Issues Legal Challenge To EU Bank Tax

By Ed Conway, Economics Editor

George Osborne has launched an unprecedented legal challenge against European plans for a financial transactions tax.

The move, which will be seen as a further sign of fraying relations between the UK and the rest of the continent, is designed to force the European Commission to reconsider the levy on Europe-related financial activity.

The Chancellor revealed the details on the fringes of the International Monetary Fund meetings in Washington.

Mr Osborne told Sky News: "What I am against is the European Commission coming up with a financial transaction tax that damages Britain. I want to make it clear Britain doesn't want to be a part of that and doesn't want to be affected by a European financial transaction tax even if we're not directly part of it.

"And so we've mounted a legal challenge in the European Court of Justice - that is the correct way to handle these things - the challenge went in yesterday."

According to insiders, this is the first time the UK has challenged legislation of this kind. Under the Commission's current plans, there will be a small charge (0.1% for shares and bonds and 0.01% for derivatives) on all financial transactions within the 11 members of the European Union which have signed up to the tax.

This alone is forecast to knock 0.25% off economic growth according to the Commission's official assessment, although some economists fear this could be an understatement.

It is feared the EU tax plans will adversely affect banks in the UK

The Chancellor said the reason for the legal challenge was that the tax will also hit Britain itself in two ways: first because it will affect any euro-denominated transactions – many of which happen in London.

Second, the tax will apply to all transactions of banks with headquarters in the signed-up EU nations, even if they are in London or outside Europe.

Treasury insiders said the worry was that it could knock significant value off British pension funds and investments.

They characterised the legal challenge, which may take years to be heard, as an important insurance policy in the legislative battle to get the tax amended.

However, analysts said that the move marked a significant escalation in tension between the UK and the Commission.

Mats Persson of think tank Open Europe said: "The economic, legal and political implications of this move for future EU-UK relations are huge… Legally, it could set out the parameters for how a 'flexible Europe' involving different levels of participation in the EU – which Prime Minister David Cameron has said he champions – will be governed.

"Politically, it's a test of the extent to which the UK – as a non-eurozone member - can halt or change EU measures with a profound impact on its national interest. Therefore, it will be a key issue in the on-going debate about the UK's continued EU membership."

The Chancellor also defended Britain's economic reputation, which has been dealt a blow this week by comments by the IMF chief economist Olivier Blanchard that Mr Osborne is "playing with fire" with his fiscal policy.

The Fund is due to come to the UK next month to carry out its annual survey of the economy. It is expected to advise the Chancellor to slow the pace of his austerity program.

"When the IMF comes to town we will make it absolutely clear that what we're doing is both enhancing the credibility of the United Kingdom by dealing with our debts and deficits but also supporting the British economy,"  Mr Osborne said. 

"For example, through the new housing scheme - the help to buy scheme which I launched at the Budget, through the work we're doing on funding for lending, through the work we've done on tax, for instance to increase the personal allowance."

Asked about criticisms of the Help to Buy scheme, under which the Government will guarantee mortgages for homebuyers, Mr Osborne said: "We are at a period of real weakness in the housing market, so the risks of a housing bubble are pretty non-existent.

"The key thing is that this scheme is time limited and we've given the keys to it to the [Bank of England's] Financial Policy Committee so it can turn it off in the future."

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