Britain is isolated in the European Union in opposing strict caps on bankers' bonuses, a European diplomat said Friday, in a dispute that could lead other EU member states to overrule London with a majority vote on an important package of financial laws.
At a meeting of the 27 governments' representatives in Brussels this week, Britain was alone in its opposition to a wide-ranging package of financial laws that also foresees capping bankers' bonuses at a one year's base salary, an EU diplomat said Friday.
"That is a difficult situation because it's a state for which the financial industry is very important," said the diplomat, who was speaking on condition of anonymity because of the sensitivity of the issue.
Britain is home to the City of London — one of the world's leading financial centers. The U.K. has vehemently opposed a cap on bank executives' pay, fearing it might drive away talent, harm the financial industry and the country's growth prospects.
Under the proposed legislation, bankers' bonuses will be limited at one year's base salary and double that if a large majority of a bank's shareholders agrees. The rule will also apply to European units of foreign banks and the employees of EU banks working overseas, for example in New York.
The package of financial laws will require all banks to hold more capital and liquidity reserves in an effort to shield taxpayers from having to pay for more expensive bailouts. It also lays the groundwork for a single banking supervisory mechanism for the eurozone, which is a cornerstone of the 17-nation zone to fight off its debt crisis. Most EU members are pushing for a rapid implementation of the entire package — by January 2014.
"We need (it) to be adopted the most rapidly possible," said the diplomat. "It will contribute to restoring international investors' trust in the European banking system. We can't allow further delays."
European finance ministers are meeting to discuss the issue on Tuesday in Brussels.
Britain could be overruled because a qualified majority is sufficient to pass the laws, but that is considered to be a politically toxic move, especially given the already significant level of euro-skeptical sentiment in the country. Conservative Prime Minister David Cameron has vowed to renegotiate his countries ties with the EU and hold a referendum on Britain's membership in a few years.
"Until now such an important matter has never been voted against the British," said an EU diplomat representing another government. "I think everyone would feel better if they accept it or abstain in the vote," he said.
London, according to both diplomats, has so far not made an alternative proposal, leaving everybody hoping that London will go along or that a face-saving compromise can be found.
On Thursday, Cameron expressed some reservations on the deal and vowed to "carefully look at the outcome of the negotiations" but stopped short of threatening to vote against the package.
European finance ministers on Tuesday won't hold a formal vote because technical details of the law package still have to be finalized, but they will discuss the issue hoping to reach "broad political endorsement," which would make the vote a month later a mere technicality, officials said.
Proponents of the bonus cap say the payments encouraged bankers to take massive risks at the expense of the long-term future of their businesses, which helped to destabilize the financial system.
"We're on to the overly high bonuses because we think that it was a major factor that helped trigger the financial crisis," said the first diplomat.
Juergen Baetz can be reached on Twitter at http://www.twitter.com/jbaetz