E.U. Pushes Regulation Over Further Spending on Stimulus Measures

French President Nicolas Sarkozy confers with German Chancellor Angela Merkel, center, and French Foreign Minister Christine Lagarde in Brussels.
French President Nicolas Sarkozy confers with German Chancellor Angela Merkel, center, and French Foreign Minister Christine Lagarde in Brussels. (By Jock Fistick -- Bloomberg News)
By Edward Cody
Washington Post Foreign Service
Saturday, March 21, 2009

BRUSSELS, March 20 -- European leaders brushed aside U.S. suggestions for more spending on economic stimulus plans Friday and said an urgent tightening of international financial rules was the best way to combat the worldwide economic crisis.

"Colleges of supervisors" should be set up before the end of the year "for all major cross-border financial institutions," they declared, and rating agencies, hedge funds and other sophisticated investment vehicles should be brought under national and international scrutiny "regardless of the country of domicile."

The anti-crisis platform, reached at a two-day European Union summit, suggested tough negotiations may lie ahead in the lead-up to a Group of 20 summit scheduled April 2 in London. The gathering, President Obama's maiden outing in such a setting, has been billed as crucial in efforts to stem the financial crisis that broke out on Wall Street in September and since has undermined economies around the globe.

While embracing the calls for reform of the financial system, Obama has put the first priority on government spending to re-inject life into faltering economies in the United States and elsewhere. At home, he has pushed through an unprecedented $787 billion economic stimulus plan, and the Federal Reserve System announced Wednesday that it would put $1 trillion more into the U.S. credit system to get cash flowing to banks, businesses and consumers.

But leaders of the 27 E.U. nations, in a communique, expressed confidence that they have done enough in Europe for now with stimulus packages totaling $510 billion, or 3.3 percent of the E.U.'s combined gross domestic product. Although deficit spending on stimulus packages was understandable given the severity of the crisis, they said, spending more would swell budget deficits to unacceptable levels under the group's Stability and Growth Pact and thus endanger the continent's long-term economic stability.

"Member states should return to their medium-term budgetary objectives as soon as possible, keeping pace with economic recovery and in conformity with the Stability and Growth Pact, thereby returning to positions consistent with sustainable public finances as soon as possible," the communique said.

Avoiding excessive spending to combat the crisis has been a particular concern of Chancellor Angela Merkel of Germany, which fields Europe's largest economy. In comments Thursday before traveling to Brussels, she cautioned against letting the Group of 20 negotiations get bogged down in "artificial discussions" on the size of economic stimulus plans.

"We should not be competing for the most unrealistic fiscal stimulus," she added in remarks to the German Parliament.

Merkel and French President Nicolas Sarkozy on Monday sent a joint letter to fellow European leaders laying out their goals for the G-20 summit and urging the Brussels gathering to put together a common E.U. platform to take to London. Their suggestions, it appeared, formed the basis for the platform issued Friday.

"Europe's entire political leadership has chosen to seek ambitious results at the London summit," Sarkozy told reporters afterward, expressing pleasure at the outcome.

Since immediately after the crisis erupted, Sarkozy has been urging what he calls a "refounding" of the international financial system to make it more transparent and bring it under cross-national regulation. With his characteristic follow-me approach, he appears to have brought a majority of European leaders, including Merkel, over to his views.

"The magnitude and the underlying causes of the ongoing global financial and economic crisis demonstrate the need to reshape macroeconomic global management and the regulatory framework for financial markets," they declared in the communique. "Prudential rules, crisis management arrangements and the supervisory framework must be strengthened at the national, European and global levels."

The European leaders said the International Monetary Fund, in collaboration with the Financial Stability Forum, should be strengthened to deal with such new responsibilities. They also said the major world economies should "very substantially" increase IMF resources to make more lending possible, particularly to poorer nations hit by the crisis, and offered $100 billion in loan guarantees to get the movement started.

Prime Minister Mirek Topolanek of the Czech Republic, which holds the E.U.'s revolving presidency, said European leaders urged strengthening IMF funding because, in their view, it should play a more active role in policing the world's financial exchanges. This should be high on the agenda of the G-20 meeting in London, he added.

In addition to hedge funds, the European leaders said the main targets for more regulation should be credit rating agencies, derivative markets, offshore banking centers and remuneration schemes in financial institutions that encourage risk-taking.

These areas also were identified at a G-20 summit in Washington last November as being in need of increased supervision. But the European leaders emphasized that the second summit in two weeks is the time to take concrete steps to bring them under scrutiny.

This is necessary, French Prime Minister Fran├žois Fillon said, not only to head off future crises but also to display an ability to get things done and to restore confidence in the badly shaken financial system. Fillon has scheduled meetings in Washington on Monday with Vice President Biden and Lawrence Summers, head of Obama's National Economic Council, to argue the European case.

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