EU leaders push for new framework to oversee world financial system

European governments have demanded rapid steps towards a new system for "global governance", which would transform the failed rules and institutions of the world financial system.

European Union heads of state and government, meeting in Brussels yesterday, made it clear that they intended to seize the financial crisis agenda at a world summit in Washington next week and not to wait for the lead of the American President-elect, Barack Obama.

The 27 EU nations agreed to present a common front at the Washington G20 summit next Friday and Saturday, calling for – among other things – an "early warning system" for crises and more transparency in financial institutions to prevent catastrophic problems from building up in future.

They will insist that specific proposals for the strengthening of the International Monetary Fund and new global rules, or principles, to govern financial markets and restrain short-term speculation should be presented to a second world summit at the end of February – just after Mr Obama takes over.

"There is a pretty detailed common position from Europe," said President Nicolas Sarkozy, who holds the EU presidency until the end of the year. "We will be defending a common position, a vision ... for restructuring our financial system."

Having led the way – after a halting beginning – in its emergency response to the banking crisis last month, the EU now believes that it has an opportunity to blaze the trail in the long-term reform of global financial rules and institutions. Whether Mr Obama and his team agree remains open to question.

Asked whether it would be better to wait until Mr Obama took office on 20 January, President Sarkozy said that the financial and economic crises were now so severe that the world "cannot wait, not even for the world's largest economy."

After the brief informal summit in Brussels, the Prime Minister, Gordon Brown, also said that the EU was determined to build on the "leadership" it had shown in the banking crisis. "You cannot govern the financial world of 2008 with the institutions created in 1945," Mr Brown said.

President Sarkozy dismissed suggestions that the EU – and especially France and Germany – were divided. The summit had been preceded by one of the now habitual spats between Paris and Berlin, However, both M. Sarkozy and the Chancellor, Angela Merkel, said that all 27 countries had supported a charter of four principles or "terms of reference" for world financial reform, drawn up by the French government.

After the meeting, President Sarkozy referred to the text as a charter for new "global governance" but this phrase had been removed from the formal wording at Berlin's request.

The 27 governments also agreed that the EU should adopt common policies to try to soften the recession in the wider economy which seems certain to follow the financial crisis. Proposals will be presented to a two-day EU summit in December. Berlin has long opposed French ideas for an "economic government" of the EU but M. Sarkozy said that all leaders – including Chancellor Merkel – were now in favour of "co-ordination" of national policies.

The Washington crisis summit will unite the G-8 group of leading world economies with large emerging nations such as India, China and Brazil. Four "principles" for rebuilding the world financial system – established at Bretton Woods in 1945 – will be presented to this G20 meeting by the EU.

The EU wants all financial institutions and markets to be subject to regulation or oversight. It wants more transparency in the accounts of financial institutions; rules to discourage short-term risk-taking; and an early warning system to spot likely global risks. Finally, the EU wants the IMF to be given a stronger role – as yet unspecified – as the overseer of the world financial system.

One idea being pushed by the Bank of England is for banks to be made to behave more "counter-cyclically", that is to lend less during a boom and more during recessions, the so-called "macroprudential tools" pioneered by the Spanish authorities. Although the agenda for next week's summit has not yet been finalised, leaders of the G20 group will be looking to repeat at least some of the successes seen during the recent G20/IMF summit, which launched the re-capitalisation of leading banks.

The EU proposals chime with those from the emerging economies. Brazil's Finance Minister, Guido Mantega, the chairman of the G20, said that the highest priority is to get the interbank credit market working again. Mr Mantega will propose that the G20 sets up separate committees to discuss three themes: anti-cyclical economic measures, the structure of the financial system, and new regulations.

Alongside issues of reform, one area of immediate concern will be the financial muscle of the IMF. Gordon Brown and others have asked China and the Gulf states, which possess many trillions of dollars' worth of available funds, to help ensure that the IMF has adequate resources, as more nations follow the example of Iceland, the Ukraine and Hungary.

The G20 group of nations comprise the leading advanced economies of the G7, plus some of the world's fastest-growing emerging nations, including Brazil, Russia, India and China. The group, thus, does not include all of the world's 20 largest economies, given that EU nations such as Spain (8th largest) and the Netherlands (16th) may be excluded. This has caused some friction in the run up to next week's summit.