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Stocks plummet as Germany gets tough on financial speculators

The euro declined against the dollar on concerns that European governments are divided on how to contain financial turmoil.
The euro declined against the dollar on concerns that European governments are divided on how to contain financial turmoil. (Tim Boyle/bloomberg News)

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By Anthony Faiola and Howard Schneider
Washington Post Staff Writer
Friday, May 21, 2010

A German crackdown on financial speculators threw global markets into a tailspin Thursday, sparking the largest losses on Wall Street in a year, infuriating other European powers as they try to stabilize the ailing euro and raising questions about the ability of world leaders to coordinate their efforts at financial reform.

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The measures announced unilaterally in Berlin earlier this week took U.S. and European officials by surprise, and they run counter to the broad pledges of cooperation that leaders of the world's top economies said would guide their overhaul of financial regulation. Instead of shoring up confidence in Europe's ability to address an array of economic problems, the actions -- including an outright ban on some types of aggressive stock trading -- seemed to backfire and spotlight divisions in the euro zone.

The fallout from Germany's actions hit Wall Street hard. Coupled with disappointing U.S. economic news, it forced the Dow Jones industrial average down 376 points, or 3.6 percent.

Germany, angry over pressure to bankroll its spendthrift neighbors, intends on Friday to press the 15 other countries that use the euro to follow its lead in setting strict caps on budget deficits to maintain fiscal order in the region. But the proposal faces significant opposition. And the tensions are highlighting the squabbling over the region's handling of the debt crisis, further eroding investors' confidence in the currency.

Still, German Chancellor Angela Merkel insisted in a speech that Germany is committed to its own path -- including stricter regulation of the speculative trading it thinks is damaging the euro and a new financial transaction tax that has lost favor in some other European countries and in the United States.

At stake is "more than a currency," Merkel told the German parliament on Wednesday, blaming speculators and high-spending neighbors for the euro's woes. "We are called on to preserve the European vision. If the euro fails, then Europe, too, will fail."

European officials appeared caught off guard, and they declined to follow. "It's important that member states act together," Michael Barnier, the E.U. commissioner for financial regulation, told reporters in Brussels. The French finance minister, Christine Lagarde, meanwhile, spent Thursday deflecting Merkel's suggestion that the euro is "in danger."

"I absolutely do not believe that the euro is in danger," Lagarde told France's RTL Radio.

German and French leaders later Thursday pledged to cooperate on financial reform and other issues. The worsening situation also led U.S. Treasury Secretary Timothy F. Geithner to alter his schedule and add stops in Britain and Germany to the end of his trip to China. Geithner is to meet with senior European officials to discuss the crisis.

The current tumult in the euro zone, which began as a crisis over Greek government debt but broadened to threaten larger financial problems, is a "potentially serious setback" that could undermine the health of banks and financial institutions and weaken economic recovery in the United States, Federal Reserve governor Daniel K. Tarullo said in congressional testimony on Thursday.

It also highlighted the gaps that world leaders must bridge as they try to craft financial regulations that can prevent another meltdown of the sort that occurred in 2008 without stifling markets. The steps announced in Germany -- a ban on what is known as naked short selling, and an intent to enact a financial transactions tax -- run counter to the direction preferred by U.S. policymakers and some other members of the Group of 20 economically influential nations.

A U.S. official familiar with the discussions said that there is still agreement within the G-20 about the basic principles of financial reform and that differences of opinion -- partly driven by the domestic politics in each of the countries involved -- are not irreconcilable. A U.S. financial reform package won Senate approval Thursday, and lawmakers say the bill could be sent to President Obama by July.


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