Osborne had travelled to Brussels in a vain attempt to defeat proposals outlined last week to set a limit of a year's salary on bankers' bonuses, protecting the status of the City and Britain's biggest industry – financial services. "I cannot support the proposal on the table," he told the session.
But his pleawas ignored and Britain was left isolated, with no other government opposing the move - which was also supported by the European Central Bank and the European Commission.
The City is by far the EU's biggest financial centre and financial services are a tenth of the UK economy. It is an absolute, if unspoken, rule that EU governments never take decisions opposed by a national government if it feels that vital interests are imperilled. Germany had invariably supported Britain on issues of EU regulation of financial services.
It is also not yet clear if the bonus caps will apply to European bank subsidiaries operating outside the EU or – as some governments want – to US banks in London, Frankfurt and Paris.
The "broad political support" to clamp down on bankers represents a watershed in Britain's relations with the EU, which have seldom been in greater uncertainty as a result of David Cameron's actions in using a veto at an EU summit, when he demanded an overhaul of the terms of UK membership and pledged a referendum on whether to stay in the EU if he wins a second term in 2015.
Martin Schulz, the parliament president acknowledged the UK's position but said "An agreement has been reached on all aspects of the legislation. There is no possible route for one member state to block the legislation. It would appear that one state has severe difficulties with the agreement but the EU must press ahead and get this important legislation on the statute book."
In what looked like a move to give Osborne an opportunity to save some face, Germany suggested a slight postponement and slight adjustment of the new regime. The timing and some of the fine detail of how the limits are implemented are to be re-negotiated over the next three weeks. But there was no doubt that the central decision, to clamp down on bonuses, was irreversible.
Michel Barnier, the EU commissioner for the single market said the year's salary ceiling - or payouts equal to two years' salary only if approved by a large majority of a bank's shareholders - was set in stone. He said it was "crystal clear" that the cap would go ahead.
Barnier rounded on the recklessness of the casino capitalism culture he blamed for the financial crises of the past five years, arguing that bankers were being rewarded for dangerous risk-taking, while taxpayers had to foot the bills for their failures. "Enough. It's over," he declared.
The new regime is to apply to 8,300 banks. Barnier wished "good luck" to those in London mulling legal action to try to overturn the bonus ceilings. The new legislation, he said, would be on "a very solid legal basis."
Session chairman, Michael Noonan of Ireland, said the meeting achieved "broad political support" for the limits on bankers' remuneration.
Osborne came under attack from Labour for being too slow to try to counter the new legislation and for failing to table alternative proposals over the past couple of years.
"It shouldn't take the EU to rein in excessive bonuses," said Ed Balls, the shadow chancellor. He accused Osborne of "failing to engage with these sensible proposals until the very last minute. It's no wonder that in Brussels he was outnumbered 26 to 1."
Arlene McCarthy, the Labour MEP and vice-chair of the parliament's economic and monetary committee, said: "Yet again, we have an example of the government's failure to proactively engage in and influence EU policy in Britain's national interest. Why has the UK government failed in the last 18 months to put an alternative proposal on the table, and waited until the last minute to raise objections?"
Osborne had mounted a robust argument against the proposals, asserting the curbs could have a "perverse" effect, generating steep rises in bankers' pay, breaking the link between performance and bonuses, and making it more difficult to "claw back" bonuses when unmerited.
Wolfgang Schaeuble, the German finance minister, offered a way to soothe the British, hoping to coax Osborne into not voting against the new rules, expected to come into force next year. The German said he wanted avoid pushing the contentious issue to a vote. The question is subject to a qualified majority vote where Britain can oppose but cannot veto. However, it is extremely rare for a vote to be taken. Schaeuble said he wanted the issue carried by consensus, proposing there should be further talks on "technical details.""There are a few technical issues still to be clarified," he said. "Then I hope in the end the United Kingdom will agree."
The details still to be settled involve how the bonuses are structured, when they are implemented, and who is subject to them. Under the existing proposal, 25% of a bonus can be made in the form of deferred payments which are discounted. Britain is trying to get that figure increased, perhaps to 30%, probably with Berlin's support. Osborne is also seeking to delay the measures taking effect and may win a 6-12 months postponement.
Any changes will need to blessed by the European Parliament which drove the new caps regime through. Barnier said: "Remuneration is a sensitive issue, sensitive for our citizens, for our taxpayers. We want to discourage risk-taking. Enough is enough. We've got to put a stop to that."
The CBI said the bonus cap would hit the UK hard: "The proposals will damage the competitiveness of the EU's financial services industry, hitting the UK particularly hard, at a time when growth should be the key priority."
Britain's powerful financial sector fears the rules will put London at a disadvantage and provoke an exodus of major banks and staff to rival financial centres.
A spokesman for London-based Standard Chartered Bank said: "We are concerned about it because we are a global bank and 97% of our staff are outside the EU. We are concerned about our ability to be competitive in attracting and retaining talent."
The new rules will not affect most bank staff, who on average earn bonuses of up to 30% of salary, but target senior management and so-called "risk takers", such as traders, whose bonuses can be many times their base salary. Analysts estimate the law will initially affect around 300 to 500 people in each large bank, or around 5,000 people in London all told.
One hedge fund manager told Reuters the cap could not be enforced: "Things like this are completely unpoliceable. If you tax people for writing with their left hand, they'll write with their right hand."
Views of bonus cap
Reduce risk and protect taxpayers The EU insists that smaller bonuses will give bankers less incentive to gamble, avoiding a repeat of the excess that led to the financial crisis.
Bankers should share the pain
With the world economy struggling and eurozone unemployment at record levels, many argue it's right to rein in City excess.
Encourage banks to focus on smaller customers
Austrian MEP Othmar Karas believes bonus caps are part of a sea change in European banking, forcing them to concentrate on small and medium-sized enterprises.
Bankers will flee Europe
This is Boris Johnson predicted: "The most this measure can hope to achieve is a boost for Zurich and Singapore and New York at the expense of a struggling EU."
Basic salaries will be raised
Banks could get around the cap by increasing basic take-home pay.
It will be harder to punish bad bankers
Bonuses paid in shares are pegged to a firm's performance, unlike cash salaries. Bonuses can also be clawed back in the event of future losses or fines - basic pay cannot.
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