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EU nations to hammer out financial oversight

European Central Bank president Jean-Claude Trichet warned EU governments Wednesday that the public will be unforgiving if authorities don't provide a stronger financial system.

Trichet's comments came a day before the 27-nation bloc hammers out major new reforms.

Finance ministers from each country will hold talks Thursday and Friday about a new financial oversight framework for Europe, moving forward from a pledge that the world's G-20 rich and developing nations made last week to not allow a return to banking as usual.

"Our own people will not forgive us if we don't deliver a much more resilient financial system," Trichet said.

The EU ministers will also discuss how they should withdraw economy stimulus programs that are stoking feeble economic growth and adding to huge public debt they built up by rescuing banks and spending far more on welfare during the downturn.

Trichet said "the next few years are crucial for building a strong, competitive and less leveraged financial system which will be subjected to proper regulation and supervision."

The EU's top economy official, Joaquin Almunia, also warned that regulators could not allow some financial sectors to set their own rules because they "have demonstrated that they are not able to."

Putting that into practice means adding a new EU layer to a patchwork of financial supervision across the bloc, with the EU executive suggesting that new EU authorities should oversee — and possible overrule — national supervisors for banking, insurance and financial markets.

Governments are likely to want to limit the circumstances under which the EU authorities could overrule them. The European Commission describes it only as a last resort to resolve a dispute between different national supervisors or to order a nation to bring technical financial standards in line with others.

EU governments were also being asked to approve the creation of a new economy watchdog, the European Systemic Risk Board, which would be tasked with monitoring emerging risks to the economy such as highly leveraged banks, swelling asset bubbles and worrying trends on markets.

The board would issue recommendations and warnings to national governments and could ask them to comply or justify why they weren't doing something. It would not be able to force them to act.

The ECB, which sets borrowing costs for the 16 nations that use the euro, will help run the new board and its president will likely lead it. This has triggered concern among EU countries outside the euro zone that this will give the ECB a say over countries that don't use the euro.

EU nations will also try to lay out a coordinated plan for how they all should end stimulus spending that aims at speeding up economic growth this year and next year to end the worst recession since the 1930s.

"It's absolutely necessary that we start to design and communicate exit strategies," said Swedish Finance Minister Anders Borg, who will lead the talks because Sweden holds the EU presidency.

This could lead to empty words as some governments prepare to borrow more and spend heavily.

France said its debt would soar in coming years to 91 percent of economic output in 2013. Its yearly budget gap is set to swell to a record 8.2 percent of gross domestic product this year and 8.5 percent in 2010, it said, up from 3.4 percent last year.

It also plans to borrow heavily to finance infrastructure work, which will likely increase the debt even further.

This will see the second-largest euro nation flaunt EU budget rules designed to keep the euro currency stable that require the 16 countries to keep deficits below 3 percent of GDP and debt under 65 percent of GDP.

It could also set it on a collision course with Germany, which has repeatedly called on European nations and others to start repaying debt as soon as possible.