Chancellor George Osborne says Britain will contribute more to the IMF as it comes to the aid of struggling EU countries, but only if the eurozone takes action to deal with its debt crisis.
Mr Osborne made the comments in a speech to business leaders at the World Economic Forum, where he also announced details of fresh legislation which would shake up the City and give the Treasury the power to force the Bank of England to pump more money into the economy during a financial crisis.
Speaking in Davos, he said of plans to boost the coffers of the International Monetary Fund (IMF): “The UK is a long-standing supporter of the IMF – indeed we were instrumental in its creation – and we stand ready to play our part in that global effort if certain conditions are met.
“Crucially, IMF resources to support individual countries cannot be a substitute for further credible steps by the eurozone to support their currency. In other words, the world needs to see the colour of their money before it contributes any more.”
At Davos, Mr Osborne also unveiled details of how Britain intended to prevent a repeat of the banking crisis which led to hundreds of billions of pounds being taken from the public purse to bail out the banking sector.
The financial services bill, published today, will give the Treasury the final say over the Bank of England in order to protect public finances and put the bank in charge of day-to-day policing of the financial sector.
Mr Osborne said: “When taxpayers’ money is at risk in a crisis, this legislation gives the chancellor the power to direct the Bank of England to act. Independent central banks should not be put under pressure to do what governments do not have the courage to do on their own account. There will be no ambiguity about who is in charge.”
Under the bill, the Financial Services Authority (FSA) will be scrapped from next year. It will be replaced by the Prudential Regulatory Authority, a subsidiary of the Bank of England, to supervise banks.
In the FSA’s place willl also be the Financial Conduct Authority, which will police markets and can regulate consumer credit.
The government will remain responsible for the outcome of any directions to the Bank of England, and will “take the resulting risk on its balance sheet”, Mr Osborne added.
Former chancellors have already spoken of the difficulties of not being able to order the bank to act.
In his book published last year, former Chancellor , Alistair Darling, who presided over the 2008 crisis, said: “The Bank was independent and the governor knew it. We did not agree on what to do.”
Under the Bank of England Act of 1946, the Treasury can already direct the bank after consultation with the governor if they consider it to be in the public interest.
But Mr Osborne said the new law would be a “more credible tool than the 1946 power of direction, which has always been regarded as a nuclear option and therefore never used”.
It will only be used “if the direction is necessary to resolve or reduce a serious threat to the stability of the financial system”, he added.
Meanwhile at Davos, Olli Rehn, European Economic and Monetary Affairs Commissioner, also announced that a deal to rescue Greece from economic collapse is expected to be announced before the end of the month, easing bond market tensions.
“The Bank was independent and the Governor knew it. We did not agree on what to do.” Alistair Darling
“If not today, then over the weekend, and preferably in January, not February,” he said.
Although Greece has been finalising a new rescue package with the private sector, it has been difficult because the country has previously failed to honour commitments to economic and fiscal reform.
The emerging deal still leaves a funding gap of 12-15 billion euros to bring Greece’s debt down to a level of 120 per cent of GDP – the level described as ‘sustainable’ by the IMF, according to EU officials.
However the ECB’s governing council is debating whether and how to contribute to a package for Greece, and has not yet taken a decision.
Leaders of the 17-nation currency area will also decide in coming weeks whether to combine a temporary rescue fund for countries in difficulty with a new permanent bailout fund to give Europe more financial firepower, Mr Rehn added. This could entail combining the 250 billion euros left in the temporary European Financial Stability Facility, around 500 billion euros from the permanent European Stability Mechanism, and an additional 500 billion euros sought by the International Monetary Fund, he said.