Thursday, March 12, 2009

Europe, US split deepens before G20 finance talks

Who will remember the poor countries which the IFIs have pledged to help? They didn't when they could. Now they cannot even save themselves


World finance chiefs prepared for a ministerial meeting of the G20 leading economies near London on Saturday that threatens to expose deep divisions over how to halt the raging economic crisis.

Just three weeks before a gathering of heads of state from the Group of 20, discord seems to outweigh lip service to coordination and a German-French drive to focus on cross-border rules for finance is further souring the air.

"We have agreed that Germany and France will send a common signal at this summit" on April 2, German Chancellor Angela Merkel said at a joint press conference with French President Nicolas Sarkozy in Berlin.

"The issue is not spending even more but to put in place a regulatory system to prevent the economic catastrophe that the world is experiencing from being repeated," Merkel said in a direct rebuttal to US calls for more spending.

There must be "regulation and transparency of financial markets," she said.

US President Barack Obama, who enacted a 787-billion-dollar stimulus bill last month, tried to bridge the gap on Wednesday, calling for a two-pronged G20 effort to fix the global economy: stimulus measures and regulatory reforms.

But after a meeting of eurozone finance ministers this week, their chairman Prime Minister Jean-Claude Juncker of Luxembourg rejected the US calls for more pump-priming by other G20 economies, declaring such proposals "do not suit us."

Juncker after conferring with Czech officials in Prague on Thursday again voiced opposition to any additional spending plan to combat the crisis.

"The European recovery programme represents a spending level of 3.4 to 4.0 percent of GDP," he said.

"Our public finances are beginning to suffer and we must take account of the effects these programmes will have in 2009 and 2010 before we undertake additional spending."

The US stimulus is substantially more than the 400 billion euros engaged by 27 EU countries. The two total economies are of comparable size, but the EU has not forged an integrated response.

US Treasury Secretary Timothy Geithner has also called for the International Monetary Fund's "New Arrangements to Borrow" credit programme to be boosted to 500 billion dollars -- far more than proposed by the Europeans.

For the whole of 2009, Britain is chairing meetings of the G20 -- a grouping of 19 developed and developing countries plus the European Union that includes China, Germany, Japan, Mexico, Turkey and the United States.

The main point of contention appears to be a push by the United States and Britain -- which have angled much of their rescue spending on boosting demand -- for some leading EU countries to do likewise.

The United States and Britain have included heavy demand-side measures, such as a cut in sales tax in Britain, because they stimulate activity quickly.

They argue broadly that some countries, principally Germany but also France, have focused unduly on increasing state spending on investment in industry and infrastructure and should now allocate extra funds to spark consumption.

However, leading countries in Europe face constraints on their big budget deficits, which are rising markedly above EU limits.

German officials have also begun to talk about "exit strategies" from the massive state spending and support programmes once the crisis begins to abate.

European Commission chief Jose Manuel Barroso on Thursday defended Europe's efforts to soften the blow of the global crisis.

"The social system of Europe is very different from the American one," he told a news conference in Brussels.

"We have, compared to the US, a very ambitious system of social safety nets, in terms of unemployment, in terms of public health and in many other areas.

"So when we talk about fiscal stimulus, it's not the same thing in the US and in Europe because the Americans usually think about discretionary additional fiscal stimulus," he said.

Finance ministers and central bankers from G20 economies, will begin arriving on Friday at a hotel in the small town of Horsham south of London where the meeting is to be held.

"Ministers will discuss medium-term regulatory frameworks, the need for improvements to the financial system and wider economic stimulus and speak out against protectionism," Investec Securities economist Philip Shaw said.

Labels: , , , ,