VIENNA/LONDON (Reuters) - Austria will join Luxembourg for talks with the European Union on how to crack down on cross-border tax cheats, Chancellor Werner Faymann said on Tuesday, signaling an easing of Vienna's hardline stance on coveted bank secrecy.
Faymann, a Social Democrat, stressed that Austrians' domestic bank accounts would remain shielded from the taxman's prying eye, but foreigners' wealth in local banks could face unprecedented scrutiny if the talks with Brussels go well.
As momentum for tax talks grew, Luxembourg Finance Minister Luc Frieden said his country may end its bank secrecy rules by automatically handing over details of account holders to other EU states.
The moves mark a U-turn for the two countries that for years refused to share personal data on savers with fellow EU members. They instead get banks to withhold tax on EU citizens' interest income and give the money anonymously to home countries.
But with austerity-minded EU peers keen to collect more tax revenue from citizens' offshore wealth, the model has come under heavy pressure. This has grown since last month's bailout of Cyprus, whose oversized banking system had gorged on foreign funds attracted by low taxes and easy regulation.
The European Commission warned Austria on Monday that its banking secrecy would put it in a "lonely and unsustainable position" if it did not adopt the same rules as other countries in sharing data on foreign depositors.
Faymann took the plunge on Tuesday, portraying the move as a way to protect Austria's reputation and help to catch foreign fraudsters while preserving his compatriots' privacy.
"We are trying to find an appropriate form of combating tax fraud more strongly than before. We will conduct talks together with Luxembourg," he told reporters after a cabinet meeting.
Asked if that meant Austria was giving up its decades-long resistance to sharing the identities of savers, he said: "We are conducting these talks together with Luxembourg so that something comes out of it. That is what it means."
Before the meeting, conservative Finance Minister Maria Fekter stressed that Austrian law did not let the country share personal information about bank depositors with other states.
"In our constitution, privacy and data protection get very high priority. That really does not fit with an automatic exchange" of data, she said, questioning whether EU law allowed special treatment of other EU nationals with Austrian accounts.
In London, Frieden said Luxembourg was considering an automatic swap of information on depositors. "It has not been decided, it is something that is being discussed in the government," he told Reuters.
Luxembourg's banking system holds deposits equivalent to about 10 times the tiny country's economy.
Austria's banks, the leading lenders in emerging Europe, at times use banking secrecy as a marketing tool, noting that only a constitutional amendment could end the centuries-old practice.
But foreign deposits play a relatively modest role. Central bank data show other EU citizens have around 35 billion euros ($45.6 billion) in banks here, a tenth of overall deposits.
"Our business model does not depend on banking secrecy," Erste Group (ERST.VI) Chief Executive Andreas Treichl said in an online chat session his bank held on Monday.
Still, banking secrecy strikes an emotional chord with many Austrians, and politicians routinely promise they will defend "grandma's passbook" from state snooping.
"The government already knows my husband's income when he earns it. How much we choose to have in our savings is private and should be anonymous," Vienna resident Theresa Schauer said.
Management consultant Siegfried Neubauer, 48, said the debate was meaningless before elections due by late September.
"I don't really know why we're talking about it at all. It's just stirring up emotions before the elections. When the politicians say: 'Hands off our passbooks!', everyone jumps up and says: 'correct!' I'm skeptical."
One government official, who asked not to be named, said banking secrecy was more of an emotional than a rational issue. "The public has the impression that if you lift banking secrecy my neighbor can know what I have in my passbook," he said.
But he added that in any event the tradition is deeply rooted in predominantly Roman Catholic Austria. "Catholic countries like secrecy. Openness is a very Protestant kind of concept," he said. ($1 = 0.7682 euros)
Additional reporting by Georgina Prodhan and Derek Brooks; Editing by Catherine Evans and David Stamp