By Andrew Osborn
LONDON (Reuters) - Foreign Secretary William Hague called on Britain and Germany to lead a campaign to reform the European Union on Friday as he explained how the bloc could be overhauled and derided planned EU financial services regulation as "folly".
In a speech in Germany aimed at persuading Europe's most powerful nation to back Prime Minister David Cameron's plans to try to reform the EU ahead of a possible British EU membership referendum, Hague set out some of the changes Cameron hopes to win.
"We want to get on with the business of delivering that reformed EU. And here, Britain and Germany must lead the way," Hague told a policy conference in a castle outside Berlin according to a transcript of a speech his office said was subject to minor changes.
"Finding the right balance between integration in Europe for those who need it, and flexibility where it is best for our economies and our democracies, is the great challenge of German and British diplomacy over the next few years."
Hague's intervention follows a promise Cameron gave in January to try to renegotiate Britain's membership of the EU and hold an in/out referendum if he wins the next national election in 2015, a pledge he said was designed to address deep public unease about the EU's far-reaching role in British life.
Hague said EU states should consider giving national parliaments the right to block EU-wide legislation they felt was over-reaching to clip the powers of the European Commission, the EU's executive body.
That builds on a British idea to give EU member states more power over how the EU executive formulates policies.
And he said he believed that EU states should push to deepen the 27-nation bloc's internal single market in digital, services, and energy, while attempting to conclude "all ongoing and potential free trade agreements" with other countries.
Britain and Germany should also join other EU states in drawing up a list of burdensome EU regulations on business that could be simplified or scrapped, he added.
"FEET IN CONCRETE"
Hague saved his strongest words for a proposed EU cap on bankers' bonuses and a planned tax on financial transactions.
"If we strangle ourselves with regulation that drives away business, you can be sure that Singapore, Dubai and New York will be ready to take advantage of our folly," he said, saying that EU regulation risked setting "our feet in concrete".
"If we impose excessive requirements on financial institutions, we throttle businesses' access to lending. If we tax transactions, we make it more expensive for firms to hedge against risks. We end up holding back enterprise in general: not just banking but everything that we make, build or sell."
Under pressure from the surging anti-EU UK Independence Party, eurosceptic lawmakers in his own Conservative Party, and a predominantly eurosceptic press, Cameron's EU strategy has caused concern in some business circles about the uncertainty it creates for investors. But other business people back Cameron.
His plans have had a mixed welcome across the EU itself, with some countries and EU officials warning Britain cannot cherry pick the parts of the EU it likes while discarding others. The United States has also said it would prefer Britain to remain part of the EU.
German Chancellor Angela Merkel's reaction to Cameron's plans has so far been more restrained than that of some other EU leaders. After the two held a weekend meeting in Germany last month Cameron's office said they had both agreed on the "urgent need" to make the EU more flexible.
British officials say Cameron's attempt to win Germany's backing for EU reform reflects his desire to find a consensus for change that benefits all EU states not just Britain.
(Editing by Alison Williams)