France and Germany drew the battle lines tonight ahead of tomorrow's G20 meeting, demanding stricter banking regulation than that being proposed by America and Britain, and vowing to speak with a united voice at the summit.
The French president, Nicolas Sarkozy, insisted tighter financial regulation of banks, executive bonuses, hedge funds and offshore tax havens was a "red line" for France and Germany, and rejected US suggestions of further fiscal stimulus packages to pull the world out of its worst economic crisis since the 1930s.
The Franco-German stance, reviving an alliance that dominated Europe in the past, raises the stakes for Gordon Brown and Barack Obama, who earlier played down an apparent rift with their European counterparts. The prime minister had said a deal was just hours away.
"France and Germany will speak with a single voice," Sarkozy told a joint news conference in London with Angela Merkel, the German chancellor. "Of course we have to make compromises ... but compromise has to be engaged in by all regions of the world, especially as the crisis didn't actually spontaneously erupt in Europe, did it?"
Sarkozy said he was not pointing the finger of blame and he praised Obama and Brown, but he added that Franco-German demands on tighter regulation of financial institutions and bankers' pay were non-negotiable.
"This has to be a worldwide decision to inject new ethics into trader remuneration," he said, in a combative tone. "These are our red lines. We are totally prepared to discuss other things so long as these issues are clearly dealt with and solved."
Asked whether he was ready to walk out of the summit if his demands were not met, he said: "This is nothing to do with ego or temper tantrums, this has to do with whether we are up to the challenges ahead or not."
Merkel said that France and Germany wanted to see "a new architecture and new regulations for financial markets" spelt out very clearly in the final communique of the summit and insisted the meeting must result in concrete actions, not just talking points.
Sarkozy's fighting talk contrasted with earlier comments made by Obama and Brown about convergence and consensus between the G20 leaders.
"The separation between various parties involved has been vastly overstated," Obama said at a joint press conference with the prime minister, adding he expected world leaders to reach an agreement on a blueprint for recovery tomorrow. "All of us here in London have a responsibility to act with a sense of urgency. Make no mistake: we are facing the most severe economic crisis since world war two."
Calling Britain and America "partners of purpose", Brown suggested the two countries would help bring world leaders together at the summit, which is being targeted by thousands of anti-capitalist protesters who clashed with riot police in London's financial heart today and are set to stage further protests tomorrow.
"We are within a few hours of agreeing a global plan for economic recovery and reform," the prime minister said.
Amid frantic diplomatic efforts to secure a deal, Brown spoke to Sarkozy by telephone after his press conference with Obama, the prime minister's spokesman said.
"We are making good progress, but we are not there yet,'' the spokesman told reporters. "There are still a number of issues that need to be ironed out. No one is proposing a world financial regulator."
Obama, on his first official visit to Europe as president, reiterated his call for countries to provide more fiscal stimulus, saying the US could not be expected to act alone to promote growth. "It can't just be the United States as the engine. Everybody is going to have to pick up the pace," he said, adding that he believed other world leaders had recognised that. Obama acknowledged, however, that leaders were not going to agree on every point.
Asked about how long the economic crisis would last, Brown and Obama did not give a timeframe but said its duration would depend on the degree of concerted action. The US president said recovery would depend on how swiftly countries took action on financial regulation, on reforming international financial institutions, on helping banks manage toxic assets, on managing capital outflows from emerging economies, and on shielding the poorest countries from the downturn.
"All those things will help determine whether this ends up being a slow rolling crisis, that takes a lot more time to cure it, or whether we start seeing significant recovery," he said.
"I don't think there is any doubt that 2009 is going to be difficult."
The US president, however, suggested people act out of hope and confidence in their future and not out of fear.
"Despite the current hardships we are going to get through this," Obama said. "Basing decisions around fear is not the right way to go."
Moving beyond the financial crisis, Obama and Brown said they had discussed Afghanistan, Iraq and Iran. Obama later held talks with the Russian president, Dmitry Medvedev, at which the two leaders agreed to cut nuclear warheads, and with the Chinese premier, Hu Jintao, after which it was announced the two countries would begin to hold high-level bilateral meetings on the economy.
The G20 leaders will be holding formal negotiations tomorrow, but met this evening at a state banquet at Buckingham Palace.