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EU unveils bank tax plans

Banks across Europe should be forced to pay a levy into a multi-billion pound fund that would cover the cost of future bank collapses, the EU has proposed.

The EU Commission in Brussels yesterday announced plans for EU countries to introduce a tax on banks that would be used to manage financial collapses so that taxpayers do not have to foot the bill.

The money would be collected and administered by national governments, but would not be used directly for bailing out or rescuing struggling banks.

Internal Market Commissioner Michel Barnier said the reserve would be used "only to ensure that a bank's failure is managed in an orderly way, and does not destabilise the financial system".

Chancellor George Osborne welcomed the proposal, but made clear the Government wants the right to use the pot of money on any domestic policies it chooses.

Speaking after talks with US Treasury Secretary Timothy Geithner at 11 Downing Street, Mr Osborne said: "The Conservative Party made an argument in the recent general election that the UK 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."

The Chancellor added: "We will be setting the design of that levy going forward, but I think the IMF has created a good framework for how a bank levy might look."

The UK believes ring-fencing the proceeds would create a "moral hazard" - with banks more likely to take risks if they know there is a rescue fund.

Mr Geithner said Europe had "the right elements" to solve its fiscal crisis, and now needs to put them into practice to calm markets.

"The European leaders have put together a very strong programme of reforms on the fiscal side, and a very strong commitment on the financial side," he said.

The EU bank tax was announced as the Organisation for Economic Co-operation and Development said that the Bank of England should begin hiking interest rates in the second half of this year, and lift borrowing costs to 3.5% by the end of 2011, in order to control the rising inflation.

The OECD report also said that the Irish economy "appears to be close to a turning point".