LONDON (Reuters) - London and Frankfurt should combine their lobbying clout to stop European Union rules from damaging their global competitiveness in finance, a top German politician said on Tuesday.
Roland Koch, state premier of Hesse, home to Germany's main financial centre Frankfurt and one of Chancellor Angela Merkel's closest allies, said the sector must avoid "collateral damage" from a wave of new regulation.
The EU is acting on lessons learnt from the global financial crisis by cracking down on derivatives, hedge funds, private equity groups and patchy supervision.
Most of the financial rules applied in Britain and Germany are approved by majority voting at the EU level.
Koch said 20 of the EU's 27 members have no big financial centre and may be tempted to push for far tougher rules to win electoral favour, knowing they will be little affected.
Divisions between London and Frankfurt would allow such countries to be "referees" that decide their future.
"When you want to prevent that it's necessary to come to common issues and common proposals," Koch told reporters during a visit to London's financial community.
"When we are not able to cooperate and communicate, especially in the issue of regulation, we both will suffer."
Koch cited an EU draft law to regulate hedge fund managers as an example of the need to thrash out a common approach.
Frankfurt has already been hit by what critics see as a case of home-grown populism when Germany shocked its EU partners earlier this year by unveiling plans to unilaterally curb short selling.
Britain and other EU states refused to follow suit.
The measure would not be a "competitive burden," Koch said but hoped it would be the first and last go-it-alone action.
"I hope we will come to multinational or international solutions as fast as we can because this is the only chance to prevent the national parliaments having new discussions about national legislation," Koch said.
He steps down as premier of Hesse next month.
His visit to London kicks off a long-term dialogue between Frankfurt and London with the two-year old Frankfurt Main Finance body a channel for the first time.
As Germany and France have close political ties, talks with Paris' financial centre is less of a priority, Koch said.
(Editing by Susan Fenton)