"The first priority is to build a new global financial architecture. The European Union must assert a common position and take the lead on this issue," stress German Chancellor Angela Merkel and French President Nicolas Sarkozy in the letter, published yesterday.
"We are determined to obtain concrete results at the London Summit to strengthen international financial regulation […] The European Union must propose that all hedge funds and other funds likely to create a systemic risk are subject to appropriate registration, regulation and supervision."
Merkel and Sarkozy add that Europe "must work on an effective sanction mechanism" to "protect itself from the risks" posed by tax havens. These so-called "uncooperative jurisdictions" will have to be black-listed at the G20, they add.
US, UK and Netherlands keener on recovery than regulation
The Franco-German letter comes amid transatlantic divisions over the G20 priorities, with Washington focusing on increased government spending and some European governments stressing regulation as a priority.
Paris and Berlin refuted claims that Europe is not spending enough to fend off the crisis. "With a total of over 400 billion euro (around 3.3% of the EU's GDP) […] Europe is at the vanguard in the fight against the recession," the letter reads.
Speaking to French journalists yesterday, a senior European diplomat said it would be "a mistake" to prioritise economic recovery plans over measures to police the global financial system.
The diplomat, who was speaking off the record, also refuted claims by Dutch Finance Minister Wouter Bos that regulatory measures would arrive too late to tackle the ongoing recession. "Minding about financial regulation and supervision is not minding about future crises - it directly relates to the current crisis," he stressed. "The restoration of a normal functioning of the financial system is the first condition for economic recovery."
France and Germany are calling for the quick implementation of the De Larosière report on financial regulation, insisting that initial measures to regulate rating agencies and hedge funds "will have to be adopted before June".
However, the renewed calls from Paris and Berlin for greater focus on financial regulation will not go down too well with other EU leaders, who are meeting in Brussels on 19-20 March to finalise Europe's position ahead of the G20 meeting in London.
"The British are not in a hurry" to implement the report's recommendations, admitted the European diplomat. Indeed, UK Prime Minister Gordon Brown is facing pressure at home from the Conservative Party and the City to avert a "power grab" from Brussels over financial regulation.
Doubling the IMF's resources to $500 billion
At their summit on 19-20 March, EU leaders will also back calls to double the resources of the International Monetary Fund (IMF) to $500 billion to help countries hit by balance of payments problems.
EU countries are ready to contribute $75-100 billion on a voluntary basis to the IMF, according to draft summit conclusions obtained by EurActiv.
European leaders are also set to call on the European Commission and Council to "rapidly examine the possibility of increasing the ceiling for the Union's support facility for balance-of-payments assistance," which is currently set at 25 billion euro.
But the summit conclusions will refrain from making overly detailed recommendations on how to assist countries such as Hungary, which is calling for a multi-billion bailout fund for Eastern European states (EurActiv 1/03/09).
"The more precise we are in the assistance mechanisms that could be put in place, the more we create additional risks," warned the EU diplomat, saying "one should not give away too many details".
"You should not see in the vagueness of the formulation an absence of mechanism. It is part of our crisis-management strategy," the diplomat added. "Asserting that we have done what is needed is the best way to restore confidence."
