By Edward Cody
Washington Post Foreign Service
Friday, October 17, 2008
BRUSSELS, Oct. 16 -- European leaders on Thursday urged that a pending international summit carry out an urgent overhaul of the world's financial architecture and impose new controls on freewheeling bankers and traders. U.S. officials pledged that all good ideas would get an airing but hinted of opposition to giving new authority to international regulators.
French President Nicolas Sarkozy, who holds the European Union's rotating presidency, said here that he will meet President Bush on Saturday in Washington to lay the groundwork for the conference, which the Group of Eight industrialized countries is convening. It should "re-found the capitalist system" that has governed international financial exchanges since World War II, Sarkozy said.
E.U. leaders, who on Thursday completed a two-day meeting in Brussels, have called for globally coordinated regulation of the financial industry, elimination of tax havens and a compensation system in which traders are not rewarded for dangerous risk-taking.
The current international financial system grew out of a U.S.-dominated meeting of 44 allied nations in 1944 at a genteel resort in Bretton Woods, N.H., as victory in World War II was coming into sight. In addition to establishing the World Bank and International Monetary Fund, the conference laid down a philosophy of lowering trade barriers and easing the movement of money across borders.
Launching a remake of this old model -- particularly in such a short time, with so many new participants -- would represent a daunting challenge at any time, but particularly during the twilight of the Bush presidency and the crisis that is still jolting banks and stock markets around the world.
Japan's Nikkei stock index fell by more than 11 percent Thursday, and European markets sank across the board on fears that the financial crisis was leading to a sharp economic slowdown despite efforts by government leaders to shore up the system with massive injections of funds. London's FTSE 100 was down 2.9 percent, Frankfurt's DAX dropped by 2.3 percent, and the CAC 40 in Paris was off by 3.6 percent.
Sarkozy said Thursday that continued nervousness in the markets showed all the more clearly that speed and audacity by the world's leaders are precisely what is required. "We do not have the right to let the luck and the opportunity to create the financial system of the 21st century get away from us," he told reporters after the conference.
The bloc's decision to advocate new financial rules and dispatch Sarkozy to carry the torch to Washington was seen here as an affirmation of European confidence and aspiration to leadership at a moment of reduced U.S. influence in world affairs. "Europe wants the summit before the end of the year," he declared. "Europe wants it. Europe demands it. Europe will get it."
White House deputy spokesman Tony Fratto said Thursday that "every good idea" would be considered at the still unscheduled meeting, which was called by the G-8 countries -- the United States, Canada, Britain, France, Germany, Italy, Russia and Japan. G-8 leaders have urged that leaders from nonmember countries be included as well.
Earlier, Fratto said that anything the gathering did must not restrict the flow of trade and investment. President Bush appeared to echo that concern Thursday when he said at a bill-signing ceremony that "in the long run, one of the best ways to restore confidence in the global economy is by keeping markets open to trade and investment."
José Manuel Barroso, head of the European Union's executive body here in Brussels, cautioned that the United States must be brought aboard for the conference to succeed: "There can't be a solution to the international financial crisis without the active participation of the United States."
Where the summit will take place is also unsettled. Sarkozy has proposed New York. Prime Minister Taro Aso of Japan, which chairs the G-8 this year, wants it to be in his country. He told parliament Thursday that he would prefer that no summit were necessary: "Holding such a meeting would mean we are just one step away from a worst-case scenario," Aso said.
After weeks of prodding, the Bush administration announced Wednesday that it was ready for an international financial conference. But it was unclear whether U.S. officials are as enthusiastic as their European counterparts about moving quickly in new directions.
Although the atmosphere has changed markedly in Washington in recent weeks, with government funds being freely poured into shaky banks, the United States traditionally has been a free-market champion, stripping away controls in its own banking system and demanding that other nations do the same. In contrast, since the financial disruption broke out on Wall Street last month, many European leaders have been calling for a return to more regulation.
British Prime Minister Gordon Brown called for increased supervision of international financial exchanges and suggested the Washington-based IMF should be reorganized to play this role.
"The IMF has got to be rebuilt as fit for purpose in the modern world," he told reporters here Wednesday. "We need an early warning system for the world economy that can involve the supervisors in different countries. Where international or multinational companies work in a whole series of different countries, they themselves are agreeing that instead of having 15 different supervisors meeting separately, that you have a college of supervisors to deal with this issues.
"And there is no doubt," Brown added, "that round the world there is insufficient transparency, too much opacity, too little information about what are the problems that if known about early on can be dealt with."
In an e-mail, U.S. Treasury spokesman Robert Saliterman said that "our top priority right now is restoring stability to our financial system so lending flows again to the consumers and businesses that are the engines of our economy, and we also need to take steps -- working with our colleagues abroad -- to prevent a future recurrence of the current turmoil."
". . . The international community has a very active agenda underway through the Financial Stability Forum and other international bodies," he noted in the e-mail. "We are working together to strengthen practices on -- valuation and disclosure; credit rating agencies, risk management and prudential oversight."
He declined to comment on most of the ideas being floated but did appear to respond directly to Brown's proposal for a college of supervisors, writing that "ultimately regulation is undertaken at a national level, though it must take the global context into account. In this respect, a global regulator is not a realistic approach."
Asked about the conference agenda, Sarkozy threw out a list of ideas similar to Brown's. He also said that some international supervisory body should be set up, associated with the IMF, and that tax havens should be ended. Highly speculative hedge funds should be more closely regulated, he suggested, rating agencies should be made more independent of the financial institutions they monitor, and traders' compensation schemes should no longer encourage risk-taking.
Albrecht Ritschl, an economic history professor at the London School of Economics and Political Science, said that despite talk of a new Bretton Woods, no one yet knows what a new financial exchange framework might look like. "One thing is clear," he added. "Everyone feels a need for regulation of the financial markets."
Sarkozy, Brown and German Chancellor Angela Merkel will be in close touch in coming days to push the conference to fruition, Sarkozy said. But it should also include some others in the 27-nation European Union and countries whose economies have recently grown to international proportions, such as China and India, he added.
Mark Duckenfield, a lecturer at the London School of Economics, said China and rich Middle East countries in particular would have a natural place in such a gathering because the enormous amount of money they have in reserves makes them players in the international system. "They are the only ones with any money left," he added. "They certainly have the dollars, but what they want in exchange . . . could be the problem."
Christian Dreger, chief economist at the German Institute for Economic Research in Berlin, cautioned that there will be no quick changes. "Different countries will have different interests," he said. "Their banks are affected differently by this. It will be a long-run process."
The E.U. summit that ended Thursday also pledged to proceed with costly anti-global-warming programs despite the crisis, and to extend a bank bailout plan to all of the bloc's 27 member countries.
Staff writer Peter Whoriskey in Washington, correspondent Kevin Sullivan and special correspondent Karla Adam in London, correspondent Mary Jordan and special correspondent Shannon Smiley in Berlin, and correspondent Blaine Harden in Tokyo contributed to this report.