France and Germany have called for rapid agreement on new EU rules to ban elaborate forms of speculation on national debt and company shares.
In a show of solidarity intended, in part, to compensate for their policy quarrels in other areas, Chancellor Angela Merkel and President Nicolas Sarkozy sent a joint letter to the European Commission yesterday calling for European measures to outlaw "naked" selling of stocks and insurance on sovereign, or national, debt.
Ms Merkel and Mr Sarkozy said: "The return of strong volatility in the markets makes it necessary to question certain financial methods... The commission's work should include the possibility of a Europe-wide ban on naked, short sales of certain shares and securities and certain naked sales of credit default swaps on sovereign bonds."
"Naked" selling is a form of speculation which allows traders to bet on a downward movement in shares and bonds in which they have no direct commercial interest. Such speculation has been blamed by some for the 2008 market crash and recession and the current pressure on European sovereign debt and the euro.
Germany moved last month – to the anger of France and other EU countries, including Britain – to ban "naked" selling in its own markets. France has now, in effect, publicly persuaded Germany to take a more European approach – something that was already under discussion in Brussels.
The European Commission said yesterday that it welcome the sense of "urgency" implied by the Merkel-Sarkozy letter and promised to table formal proposals this summer. EU officials said privately, however, that it was a pity French and German leaders could not also agree on more urgent issues, such as ways of developing an "economic government" for euroland to establish common fiscal approaches and discourage future speculation against the euro.
Sharon Bowles MEP, chairwoman of the European Parliament's economic and monetary affairs committee, warned that a focus on financial instruments, rather than economic issues, could be counter-productive. "This denial of underlying fundamentals makes markets more nervous, not less," she said. "Markets can sniff out excuses and inadequate responses like a pig hunting truffles – [they] will not be satisfied at us giving an aspirin for symptoms, be that ratings or spreads, when the underlying deficit problem is relegated to minor billing."
A planned Sarkozy-Merkel dinner to discuss economic co-ordination issues was cancelled at the last minute on Monday. The meeting will now take place next Monday evening, three days before an EU summit in Brussels which will be dominated by the euro and European sovereign debt crisis.
The biggest market for "naked" trading in Europe is the City of London. The British Government is expected to oppose an outright ban on naked sales but may be prepared to accept some degree of Europe-wide regulation. EU officials admit, in private, that a complete ban on naked trading is unlikely and probably unworkable.
Credit default swaps (CDS) are a form of insurance policy on company or national debt. Traders in naked credit default swaps buy insurance on debt bonds that they do not own, a move that critics such as George Soros have described as akin to selling someone life insurance on someone else, and then giving them a gun.
Although the extent of naked sales of CDS is disputed, they have been alleged to be a contributory factor in the 2008 subprime crash and the current sovereign debt crisis. At one point in 2007, the amounts of CDS – naked and non-naked – issued on American sub-prime mortgages was three times the value of the whole US economy.