Why Cameron should call Merkozy's bluff

Angela Merkel and Nicolas Sarkozy are bluffing.

They say that if they do not get agreement for a new eurozone relationship at 27-member level they will simply make a new treaty for the 17 euro members. But there are two key reasons why they need all 27.

First, starting afresh with a new treaty could take a long time to agree - whereas the Lisbon Treaty offers the means to "fast-track" changes. With a new European banking crisis looming fast, Merkozy face a race against the clock to strike a deal.

The 17 will also want free access to the European Commission and the European Court of Justice to enforce new rules. They don't have the time to set up new eurozone-only entities, yet it's not clear they could annexe the ones that serve all 27 members.

There is no doubt the top priority for Britain, as well as the rest of Europe, is to see an orderly end to the eurozone crisis.

So David Cameron will be as keen as any European leader to support the means of resolution. But he will also be looking to defend Britain's national interests - particularly the City, which employs nearly two million people, generates £50billion a year in tax revenues and provides us with our most successful export. The UK accounts for 36 per cent of the EU's wholesale finance industry and has radically changed its regulatory environment to minimise the potential for future crises.

However, there are also 49 EU directives and other financial measures in the pipeline that could seriously undermine the City. A financial transaction tax would drive business from Europe overnight.

Financial services regulation (with the exception of the FTT, which is subject to veto) will come under the qualified majority voting system.

That means while Britain accounts for 60 per cent of net EU exports of international financial services transactions, it will only have about 10 per cent of votes in the European Parliament and among EU ministers.

So without direct action to protect British interests, we can be outvoted every time.

The Prime Minister has made clear his determination to defend our corner. While supportive of the eurozone's need for treaty change, he will want to make clear Britain also has a non-negotiable need to defend this key industry. He should call Merkozy's bluff.

Conservative MP Andrea Leadsom is co-chairman of the All-Party Parliamentary Group on European Reform after a 23-year career in banking and finance.