Financial Regulatory Forum

Merkel to G20: regulation before rebalancing

By Reuters Staff
September 24, 2009

Angela Merkel (R) German Chancellor and leader of the Christian Democratic Union (CDU) enters her limousine as she leaves the Chancellery on her way to Tegel airport in Berlin, September 24, 2009. Merkel urged Group of 20 leaders on Thursday to agree concrete new regulations for financial markets at a summit this week and not let themselves be sidetracked by other economic themes.    REUTERS/Fabrizio Bensch (GERMANY POLITICS BUSINESS) By Madeline Chambers and Emily Kaiser
BERLIN/PITTSBURGH, Sept 24 (Reuters) – German Chancellor Angela Merkel warned on Thursday a U.S. drive to rebalance the global economy risked distracting the Group of 20 from a more urgent need for market regulation at their Pittsburgh summit.

Merkel’s remarks in Berlin suggested tensions between the world’s third largest economy and its largest as she and U.S. President Barack Obama and other G20 leaders headed for talks on Thursday and Friday.

The United States wants G20 countries to commit to reducing the world’s reliance on U.S. consumers by boosting consumption in exporting countries, such as China, while encouraging debt-laden nations such as the United States to save more.

But there was no plan on how that would be achieved as G20 sherpas worked to complete the drafting of a summit communique.

“I have made clear we should not look for other topics and forget about financial market regulation,” Merkel said. “Imbalances are an issue. We must have imbalances and all the possible causes on the agenda. Exchange rates belong to that.”

Merkel, on track to win a second term in an election on Sunday, said the world’s leading countries were making progress on financial reform but warned the momentum could fade.

She stressed that the G20 — which groups big Western economies with emerging powers such as China and Brazil — should not shy away from measures that might prove unpopular with the banking industry, where the economic crisis began.

“We have to make sure we learn the lessons of the crisis and make sure it is not repeated. Pittsburgh will be decisive in determining whether the subject of financial market regulation continues to be a central issue. For us, it is the most important subject at the meeting,” Merkel told reporters.

“Politicians must have the courage to do things which are not immediately applauded by banks worldwide.”

NEW G20 ROLE
Leaders of the world’s biggest economies meet in Pittsburgh later in the day to discuss ways of nurturing the fragile recovery from the worst global recession since the 1930s and how to help ward off future crises.

British Prime Minister Gordon Brown said global leaders would institutionalize the G20 as the world’s main economic governing council.

In New York to attend the U.N. General Assembly, Brown said G20 leaders would meet regularly, with South Korea taking over the presidency next year.

Downtown Pittsburgh was under a security lockdown for the summit as leaders began streaming into the scenic city at the confluence of three rivers in western Pennsylvania.

The sheer volume of problems the two-day summit is set to address — from the lopsided global growth model to climate change, tougher financial regulation and caps on bankers’ pay — prompted low expectations for any near-term action.

Europe is seeking to curb the excessive risk-taking that provoked turmoil on financial markets and shoved the world economy into recession. Several European leaders are also pushing for crackdowns on bankers’ lavish pay packages.

Now that the recession in many countries appears to be ending, the challenge is to sustain the sense of urgency felt in April when the G20 agreed to work together to rescue the world economy and pledged hundreds of billions of dollars to finance crisis-fighting by the International Monetary Fund.

U.S. GROWTH RETURNS
In the latest sign of incipient recovery, the U.S. Federal Reserve said on Wednesday growth has returned to the world’s biggest economy.

The number of U.S. workers filing new claims for jobless benefits unexpectedly fell by 21,000 last week, government data showed on Thursday.

The euro zone also appears poised to emerge from recession, although most economists expect only a gradual recovery. A key indicator of German business confidence fell short of expectations on Thursday.

The summit’s final statement will say short-term and long-term risks persist and will emphasize that more action is still needed to stabilize the economy, Japan’s Kyodo News reported on Thursday, citing officials.

IMF head Dominique Strauss-Kahn struck a similar note, saying G20 leaders should keep economic stimulus plans in place as long as millions of people who lost their jobs during the crisis remain out of work.

“Once the fire is out, there’s water everywhere. It has to be mopped up,” he told Europe 1 radio. “In Pittsburgh, we have to say, there are still fires to be put out. We’ll see later how to do the mopping up.”

China gave qualified support on Wednesday for the idea of improving global imbalances — a daunting task.

China’s private consumption accounts for little more than a third of its economy, while it exceeds 70 percent in the United States and Britain. By contrast, Chinese households saved about 40 percent of their disposable incomes last year, while the U.S. savings rate was just over 3 percent.

Several nations including China, and Germany, the world’s top exporter last year, have distanced themselves from the U.S. suggestion to make the IMF responsible for regular monitoring and policy recommendations to G20 members.

The summit starts with various bilateral talks on Thursday, with Obama hosting a reception and working dinner in the evening.

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