The leaders of Germany and France on Wednesday called on Europe to redouble efforts to regulate financial markets and crack down on speculative trading by possibly banning naked short selling across the EU.
In a joint letter to European Commission President Jose Manuel Barroso, Chancellor Angela Merkel and President Nicolas Sarkozy said that "considering recent market developments, we believe there is an urgent need for the Commission to speed up its work to establish stricter control of markets."
Germany rattled markets last month by abruptly and unilaterally banning naked short-selling of euro zone government debt and major financial stocks, as well as naked credit default swaps involving euro zone debt, which some blame for worsening the debt crisis.
The move spooked investors at the time and was condemned as ham-fisted dirigism by market experts. Some other EU countries said they were reluctant to follow Germany's lead, exposing the EU's lack of coordination during the crisis.
In the letter, which was dated Tuesday but released early Wednesday by Merkel's office, the two European leaders said "it is indispensable to reinforce the transparency of short positions on equities and bonds, especially sovereign bonds." They said progress should be made ahead of a meeting for European finance ministers in July.
Short-selling occurs when traders sell shares or investments they do not own themselves. Credit default swaps are a type of insurance against a borrower going bankrupt. Both have become a large and lucrative market.
Merkel and Sarkozy wrote that "the severe turbulence observed on financial markets over recent months has ... led to considerable concern among the Member States of the European Union and all our fellow citizens."
The leaders added that "the return of high market volatility raises some legitimate questions, specifically concerning certain financial techniques and the use of certain derivative products, as, for example, short selling and credit default swaps."
During recent weeks, Merkel's government has stepped up long-standing calls for tighter regulation of the financial sector as Berlin and its EU partners deal with the euro zone debt crisis.
Analysts have criticized Germany's ban on short-selling, saying unilateral action by one government suggested lack of unity in fighting the market turmoil from Europe's government debt crisis.
Merkel and Sarkozy also wrote that the Commission should consider "the possibility of European harmonization of the time allowed for securities settlement and delivery relating to trading on European markets."
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