Brussels  - European Union leaders meet in Brussels on Thursday and Friday to forge a common position on how to better regulate the international financial markets, whose persisting crisis is feeding into the bloc's rapidly-deteriorating economic outlook.

The spring council meeting in Brussels is seen as a key stepping stone towards London's Group of 20 summit on April 2, which will be called on to overhaul the global financial sector and avoid future credit crunches.

EU heads of state and government are expected to issue "agreed language" on what they will want to see discussed in London.

According to latest available drafts of the Brussels summit's conclusions, leaders will want to "give priority to restoring the functioning of credit markets and facilitating the flow of lending to the economy."

They will also call on any form of protectionism to be avoided, and for world trade talks to reach an "ambitious and balanced" outcome.

Restoring confidence in the international markets should be achieved by granting more resources and monitoring powers to the International Monetary Fund (IMF), improving the transparency of hedge funds, other high-risk investments and credit rating agencies, and strengthening international supervision of major banks and insurance companies that operate in several countries.

Banks should in future build up enough capital to better face the bad times, while their managers should be dissuaded from taking excessive risks by weakening the link between company bonuses and short-term profitability.

"We expect the common language which comes out of the European Council to be consistent with the preparatory discussions for the London summit," a British diplomat said.

While the bloc's Czech presidency expects an agreement on such common language to be reached over dinner on Thursday, one potential source of friction may come from calls to fight tax havens and other potential threats to "market integrity".

The leaders of Austria, Belgium and Luxembourg fear being singled out by fellow heads of state and government because of their countries' bank secrecy rules and may well drive a hard bargain over coffee and cake.

This week's meeting comes amid fresh concerns over the poor state of the bloc's economy, which according to latest estimates may shrink by as much as 3 per cent this year and not recover before 2011.

The EU's economic recovery package totals about 400 billion euros (519 billion dollars), or 3.3 per cent of the bloc's annual gross domestic product, spread over two years. About half of this amount is made up of so-called "automatic stabilizers" - non-discretionary public spending, such as for unemployment benefits, that naturally increases during a downturn.

The package has been described as insufficient by the administration of US President Barack Obama, and most recently by American economist and Nobel laureate Paul Krugman.

But officials in Brussels say it is too early to judge whether more money will be needed.

Moreover, they note that many member states are not in the position to spend more without running even bigger budget deficits, which in turn threaten the stability of the EU's common currency, the euro.

This point was made clear by French President Nicolas Sarkozy and German Chancellor Angela Merkel in a joint letter addressed to the Czech presidency and the commission ahead of the summit.

"Excessive public indebtedness threatens long-term global stability," the two leaders wrote. "Healthy public finances thus remain crucial for the credibility and stability of the European Union."

At the same time, leaders will be called to discuss the need to increase the amount of capital that the European Commission is able to raise on the financial markets to help EU countries that run into financial difficulties as a result of the credit crunch.

The commission, which can currently rely on 25 billion euros, has already bailed out Latvia and Hungary, and is now in talks with Romania.

The most contentious element of the European economic recovery package involves the possible use of 5 billion euros in community funds to improve internet access in rural areas, invest in environmentally-friendly projects and strengthen energy connections between member states.

While the funds represent only a tiny part of the package, national egoism is clearly at play - with governments still unable to agree on where the money should come from, or on how it should be spent.

While "not everybody may be satisfied" by the latest list of projects put forward by the EU presidency, lack of an agreement would be "a failure for the entire EU," Czech diplomats warned a day before the start of the meeting.

Other issues due to be discussed by leaders include preparations for an April 5 EU-US summit in Prague with Obama, the fight against climate change, and ways to strengthen the bloc's ties to its Eastern European neighbours, including Belarus, Georgia and Azerbaijan. (dpa)