UPDATE: Germany To Oppose EU Hedge Fund ‘Passport’

Sep 29 2010 | 12:55pm ET

France has won the backing of Germany in its effort to strip the so-called “passport” giving access to all European Union markets from compromise regulations, throwing the future of those new rules into question.

EU governments, the European Parliament and European Commission have been negotiating for months over the alternative investments directive. The parliament and the U.K. have insisted on the passport, which would grant access to all EU markets to foreign hedge funds that meet EU standards, but French President Nicolas Sarkozy moved this week to block that provision. Now, he has the powerful support of Germany, the Financial Times reports.

France has always been wary of the passport, while the Germans had appeared to support the developing consensus including it. But, in an apparent change of heart, French Finance Minister Christine Lagarde said the two countries’ positions “are now perfectly aligned” following a telephone conversation with her German counterpart, Wolfgang Schäuble, yesterday.

That may be something of an overstatement. But the Germans are now opposed to extending the passport rights to hedge funds and private equity funds domiciled in regulatory and tax havens. The French have produced their own version of the directive presumably including that provision, but have refused to show it to the British.

Talks between the competing sides are still underway, and the issue is likely to come up at tomorrow’s meeting of EU finance ministers. But the two sides do not appear to be close to a deal.

“The passport would need to be part of the final compromise,” a European Commission spokesman told the FT.

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