Europe's attempt to settle a contentious treaty on blocking tax evasion has fallen flat after a row between large states and small.

Luxembourg and Austria have both vetoed a possible deal with Switzerland, which would have allowed the home of banking secrecy to retain its close-lipped reputation.

If the others are standing by the statements they have given until now, I don't see any reason why I should change my own position

Jean-Claude Juncker Luxembourg's Prime Minister

They say a compromise, proposed by the Swiss to stop EU citizens dodging their home country's taxes by squirrelling money away in Swiss bank accounts, still leaves their own financial sector at a disadvantage.

More talks are scheduled for 11 or 12 December in the wake of Tuesday's finance ministers' meeting, but the chances of meeting the 31 December deadline for signing off on the Savings Tax Directive are looking increasingly remote.

Competition

The problem for the small states - Belgium is also concerned about the directive - is that they, like Switzerland, have banking sectors which rely on a reputation for secrecy.

The Directive demands that all EU member states automatically exchange information about interest paid on foreigners' bank accounts, so as to recover tax that they owe.

Two years ago at Feira in Portugal, the three states in question have an opt-out till 2010, allowing them simply to charge a flat-rate "withholding tax" - but thereafter they will have to start opening up the books.

If Switzerland - and a selection of other countries including the US - do not follow suit, they argue, they are certain to lose out.

"Our view is that this paper (the Swiss proposal) contains a few points which do not follow the Feira conclusion," said Austrian Finance Minister Karl-Heinz Grasser.

And Luxembourg's Prime Minister, Jean-Claude Juncker, was more forthright.

"If the others are standing by the statements they have given until now, I don't see any reason why I should change my own position," he told reporters.

Staying secret

This is where the process has come unstuck.

The Swiss refuse to give up their prized banking secrecy, and insist that stopping other countries' tax evasion - a civil matter in Switzerland - is none of their business.

They are offering a withholding tax of their own, of up to 35%, as well as a voluntary exchange of information on criminal tax fraud, which they define as including actual falsification of documents.

This attitude has drawn threats of sanctions unless the Swiss play ball, a suggestion that the Swiss banking industry has tended to see as little more than a bargaining chip.

The tax-hating Republican administration in the US, meanwhile, has refused even to make a formal offer, preferring bilateral deals with a range of offshore centres to the EU's over-arching plans.

Given the might of the US, no-one has ever mooted the possibility of sanctions there.

Bait and switch

The switch in emphasis to the small states follows years of hard bargaining, where the UK has often appeared the biggest stumbling block.

Most of Europe would have been content with a withholding tax, but UK Chancellor Gordon Brown blocked that proposal in 1999, fearing it would drive London's lucrative Eurobond trading business offshore.

That decision was the genesis of the desire for automatic information exchange.

But now the British seem happy to accept the Swiss position, at least for now.

It remains unclear whether this is in the hope of revisiting the information exchange question at a later date - or with the aim of forcing smaller, weaker brethren to take the blame if the Directive fails altogether.