George Osborne gave the first public hint today that a referendum may be necessary on membership of the European Union.
The Chancellor also made clear that the Government is planning to reopen the bitter divisions that led to David Cameron’s veto of UK participation in the eurozone rescue plan last December.
Mr Osborne said he would push again for safeguards for the City of London when Europe puts in place new rules to save its banking system.
But he also gave the first sign that there might be a need for a referendum, following Lord Owen’s demands for a vote in The Times this morning.
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The Chancellor hinted that probable changes to the European Union would involve transfering powers from Westminster to Brussels, which would trigger an automatic referendum under legislation passed last year.
“I think what the public are concerned about, the British people would be concerned about, would be if there was any transfer of power,” Mr Osborne told the BBC. “A reshaped relationship with Europe would imply, would involve, a transfer of sovereignty or powers to Brussels.
“I think we have a very clear safeguard in the system now, thanks to this Government, which is, if there is any transfer of power from this country ... transfer of competence or transfer of sovereignty from this country to the European Union ... then there will be a referendum.”
His comments came hours before David Cameron indicated to an audience of students in Berlin that a referendum might be necessary if “the rules of the game” were changed, with more power being handed to Brussels.
Sitting alongside Angela Merkel after talks with her, he said: “There is a very clear role for referenda. If you are going to change the way you are governed, if parliament is going to give up powers to Europe or anyone else, if you are going to change the rules of the game ... you should ask the people first.
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“The right way to have a referendum is if you are changing the way you are governed, and you ask the people first.”
Meanwhile, the German Chancellor indicated today that she was prepared to work towards a political union in Europe even if that meant a two-speed approach, with some countries not ceding as many powers.
“We need more Europe ... a budget union ... and we need a political union first and foremost,” Mrs Merkel told German television. “We must step by step cede responsibilities to Europe. We must not remain immobile because one country or another does not want to follow yet.”
Mr Osborne said that once the changes suggested by Mrs Merkel were written into European law, Britain would resume its attempt to get new protections for its financial services industry, which ended in division and bitter acrimony in December.
“We are not going to get in the way of the risk to the Spanish banking system, but if there are steps towards a common deposit protection system, which means in effect that German taxpayers stand behind Greek and Spanish depositors, then the most ambitious end of that change will need treaty change.
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“There will have to be safeguards. There will have to be conditions to protect Britain’s most important industry and private sector employer and Europe’s largest financial centre.”
In the markets Spain enjoyed strong demand when it sold €2.1 billion of medium and long-term bonds today, passing a key test of its ability to tap investors after a minister said this week that the country was being cut off from the markets.
The Treasury sold €638 million of a two-year bond, €825 million of a four-year bond and €611 million of a benchmark 10-year bond. The bid-to-cover ratios were higher than at recent auctions, with the 2012, 2014 and 2022 bonds covered 4.3, 2.6 and 3.3 times respectively.
Spain was forced, however, to pay higher yields than at other recent sales. The 2014 bond was issued at a yield of 4.335 per cent, the 2016 bond at 5.353 per cent and the 2022 bond at 6.044 per cent, a lower price than the 6.14 per cent at which the same maturity bond trades in the secondary market.
Leaders are under intense pressure to find a solution to the crisis at their next EU summit on June 28-29. But Mrs Merkel said that not all of the problems could be solved with one meeting. She did not believe “that one summit is capable of settling everything in one fell swoop”.
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She aimed to propose a framework for moving towards political union, step by step. Sustainable growth could come only from boosting the competitive positions of all EU members, she added.
“We must, in each European country, confront our respective weaknesses,” Mrs Merkel said.
Mrs Merkel and Mr Cameron held bilateral talks at the Chancellery in Berlin today followed by a “town hall meeting” discussion with students.
Philip Webster is Editor of The Times website and former Political Editor