Cameron threatens to block euro rescue deal

Prime Minister may veto Franco-German treaty unless it safeguards the City and single market

Mr Cameron meets a military wives' choir at a Downing Street reception yesterday (PA)

David Cameron last night threatened to veto a new European Union treaty to help solve the eurozone debt crisis unless it safeguards the City of London.

The Prime Minister raised the stakes over the Franco-German plan to rescue the single currency after it emerged that the proposed treaty is likely to cover all 27 EU members, including the UK.

But Kenneth Clarke, the Justice Secretary and a prominent Europhile, told today's Financial Times that now was not the right time to demand concessions. He urged Mr Cameron to negotiate constructively and focus on "how to maintain the financial stability of the Western world".

A treaty needing approval only by the 17 eurozone nations would reduce the pressure on Mr Cameron from Eurosceptic Tory MPs to win a "repatriation of powers" in return for signing it.

France favours a "eurozone-only" deal but EU sources suggested yesterday that a majority of countries back Germany's plan for an EU-wide treaty.

So does the European Commission, amid legal doubts over whether 17 nations could use bodies such as the European Court of Justice to impose budgetary curbs on governments.

A proposed rescue package was set out in a letter to EU governments by Herman Van Rompuy, president of the European Council – the 27 heads of government who will discuss a treaty change in Brussels tomorrow night.

A leaked draft calls for "more intrusive control of national budgetary policies by the EU", with the Commission empowered to impose austerity measures on countries needing a bailout. But some of the most controversial ideas – such as depriving bailed-out countries of EU voting rights – have run into opposition and may be dropped.

Mr Cameron warned fellow EU leaders that he would ensure at the Brussels summit that the EU single market and Britain's financial services industry would be protected. He told the BBC: "I will not sign a treaty that does not have those safeguards in it, around things like the importance of the single market and financial services.

"If they choose to go ahead with a separate treaty, then clearly that's not a treaty Britain would be signing or amending, but if they want to use the European institutions then we will be insisting on the safeguards and the protections that Britain needs."

But he conceded the most important British interest now was to resolve the eurozone crisis. His veto threat will anger some in the eurozone, who have accused Britain of lecturing them from the sidelines while refusing to contribute bailout funds. It could force the summit to opt for a 17-nation deal rather than an EU-wide one. In practice, countries who want all 27 to sign might offer Mr Cameron a form of words reaffirming their commitment to the single market.

In the latest steps towards a euro rescue package, the European Central Bank is tomorrow expected to cut interest rates by 0.25 points to a record low of 1 per cent. There is anger in Brussels at ratings agencies after Standard & Poor's said 15 euro nations, including Germany and France, could lose AAA status. Yesterday S&P issued a similar warning over the bailout fund, the European Financial Stability Facility.

Sarkozy's joke at UK's tax expense

President Nicolas Sarkozy jested yesterday that France was more "business friendly" than Britain as a result of tax increases by David Cameron's government.

He suggested the estimated 300,000 young French people living in greater London would soon get "fed up" with paying British taxes and come back to France.

"Here, we are 'friendly business'," Mr Sarkozy said in approximate English. "That's a jest. Don't tell David Cameron, whom I like very much. It's a pleasantry, 'a joke'," he repeated in English. Mr Sarkozy was talking to young people at the opening in Paris of Google's new €100m headquarters for southern and eastern Europe. He added: "At the rate they are increasing taxes in London, we are going to get all our young people back. London is now the seventh biggest French city. When you're fed up with paying taxes over there, come here."

Relations between the two leaders are said by British and French officials to be excellent. They went together to Tripoli in September and were applauded by Libyan crowds for the Franco-British role in the Nato operations which helped topple Gaddafi. But at an EU summit in Brussels soon after Mr Sarkozy said Mr Cameron had "lost an opportunity to shut up" when he demanded the right to take part in negotiations on the eurozone debt crisis.

John Lichfield