France, Germany Unite to Urge Fiscal Discipline

By Edward Cody
Washington Post Foreign Service
Wednesday, March 18, 2009

PARIS, March 17 -- France and Germany appealed to fellow European nations Tuesday to take the lead in emphasizing tighter regulation and "a new global financial architecture" to combat the world economic crisis and prevent new ones.

The appeal, in an unusual joint letter from French President Nicolas Sarkozy and German Chancellor Angela Merkel, underscored the determination of Europe's major economic players to reform the world financial system as fast as possible and to keep emergency government spending on national stimulus plans as low as possible despite the crisis.

Those emphases have raised differences in priorities with the Obama administration and Britain, both of which have resolved to stimulate their economies into recovery through increased spending and have shown a willingness to incur mounting debt to get the job done. Some U.S. officials have suggested that other European governments, including France and Germany, should get onto the same sheet of music because of the gravity of the situation, despite E.U. rules mandating fiscal discipline.

The differences in approach and priorities have been lingering behind the scenes in preparations for the Group of 20 economic summit scheduled for April 2 in London, which will be the first stop in President Obama's first official trip to Europe and a milestone in efforts to shake off the global economic crisis.

"Overall, the positions of the Germans and French and those of the United States have become much closer in the last couple of years," said Roland Doehrn, an economist at Germany's Rhine-Westphalia Institute for Economic Research. "But each country has the interests of its own traditions at heart."

The joint letter was addressed to Prime Minister Mirek Topolanek of the Czech Republic, which has the six-month rotating presidency of the European Union. It urged the European Union, at a summit scheduled for Thursday and Friday in Brussels, to take a clear stand in favor of sweeping financial reforms for presentation as a unified European demand at the G-20 summit in the face of whatever hesitations Britain and the United States might have.

"The first priority is to build a new global financial architecture," Sarkozy and Merkel said. "The European Union must affirm a common position and take the lead on this subject."

In particular, the two leaders said, Europe should go to London with proposals for new regulation and supervision of hedge funds and other high-risk investments and legal tools to act against tax havens that refuse to lift bank-secrecy laws.

The first steps in increased regulation and supervision should be taken by June, they said, suggesting the G-20 summit should issue specific recommendations on what to do rather than vague principles and promises to work together. But beyond that, the two leaders also described a longer-term effort to redesign the world financial system as suggested by Sarkozy as far back as September, when the extent of the crisis was unclear.

"The European Union should support a new charter of sustainable economic activity as a framework for the work of governments and international institutions," they said. "It should be based on market principles while at the same time aiming to ensure a stable world economy, socially balanced and respectful of sustainable development. Over time, it should culminate in establishment of a world governance structure."

Reflecting in particular German concerns about fiscal irresponsibility, the leaders acknowledged that the depth of the crisis required deviation from E.U. budgetary restraints laid out in the union's Stability and Growth Pact. But they said exceptions to the rules should be ended as soon as the emergency subsides lest long-term stability be threatened.

An aide to Sarkozy, who spoke on the condition of anonymity because of the sensitivity of the subject, said the emphasis on fiscal discipline reflected a desire "by Germany and some of our other partners" to make it clear that recent economic stimulus plans "should not in any way be interpreted as an abandonment of strong budgetary discipline."

Researcher Shannon Smiley in Berlin contributed to this report.

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