In the run-up to the London summit of the world's big powers, Europe's 27 leaders agree they want more financial reform—not more stimulus
Angela Merkel, Gordon Brown and Nicolas Sarkozy may be in Brussels, but they're looking forward to the G-20 summit in London, where in two weeks they expect a showdown over the financial crisis among the most powerful economies in the world—namely the United States, China and other leading world economies.
Indeed, the so-called "spring summit" of EU leaders in Brussels this week looks more and more like a training camp for the G-20 conference on April 2. The 27 European leaders are using the day-and-a-half meeting in Brussels to cobble together some fundamental positions and negotiating strategies for London. German Chancellor Angela Merkel says she'd like all of Europe to speak with a single voice at the April summit.
Only the four largest EU nations and the Czech Republic—which currently holds the rotating EU presidency—will go to London. But they will represent the interests of the whole European bloc. On Thursday evening the EU leaders didn't take long to agree on the two essential messages: Europe doesn't want to see any more stimulus packages, but it does want to lead as a force to reform the world's finance markets.
Both messages will be presented with some defensiveness, since the Europeans aren't sure what to expect from the Americans. In spite of many contacts with the US—most recently at a meeting of G-20 finance ministers in the English town of Horsham on March 14—there is a residue of uncertainty.
Many were irritated by a recent interview in the Financial Times by Obama's economic advisor Larry Summers, who said the top priority of the G-20 summit would be to boost global demand. US Finance Minister Timothy Geithner is also backing the recommendation of the International Monetary Fund (IMF) that all countries should spend 2 percent of their gross domestic product on economic stimulus packages. In European capitals, the statements were seen as an order to pump money into the economy—which is exactly what they don't want to do.
Since then, the discord has reportedly been smoothed out in face-to-face meetings. All G-20 participants want a successful summit, including the Americans—at least that's the word in Brussels. So it's unlikely that the Obama government will demand billions in commitments from the Europeans in London.
If Push Comes to Shove
But if push comes to shove, the Europeans will argue that they have already committed 3.3 percent of the bloc's total GDP to pull the economy out of recession. That number includes various national economic stimulus packages that total around €200 billion, as well as automatic balancing measures of the social state like increases in pensions and unemployment benefits, which account for an additional €200 billion. In Germany, Chancellor Merkel proudly told her parliament in Berlin on Thursday, that figure is 4.7 percent—well above average.
The leaders in Brussels also agreed to some additional measures:
€5 billion will be invested in broadband Internet and energy projects in the first true EU-wide stimulus measure. Germany is expected to foot €1 billion of the bill—which is the reason for a German delay in approving it.
The EU crisis fund for governments in arrears to the Union will be doubled to €50 billion. This provides relief for mostly Eastern European countries.
The Europeans also want to strengthen the IMF so it can provide credit to countries suffering from the financial crisis. The EU wants €250 billion in additional funding to go to the IMF, and Brussels is prepared to provide €75 billion of that money.
All that, the Europeans will argue, is plenty. Austria's finance minister reflected the mood in Brussels when he asked: "By flooding the market with money—where does that leave us?" The US government is seen as a bad advisor in financial matters—the Europeans think its crisis management is suspect. The US central bank's decision to pump $1.3 trillion into the economy has fuelled speculation in Brussels that the Americans have still not entirely put an end to their old fixation on growth. The gigantic figure is being received with a combination of anger and disbelief.
In Search of the Pressing Issues
For weeks the German government has pushed for a "Charter for Sustainable Economic Activity." At its crux lies the principle that countries should not get so indebted that they are unable to recover. For the time being, the Europeans have managed to unite behind this creed. The euro appears disciplined, moreover, with Germany helping in large measure to guarantee its stability.
Europeans are also ready for a debate over regulation. Lord Adair Turner, who chairs the British financial watchdog Financial Services Authority, on Wednesday presented ideas for financial reform. They match many recommendations made last month by former IMF director and French central banker Jacques de Larosiere, at the request of the EU Commission. Both want to see banks retain a higher amount of equity capital, a European-level supervision of bank behavior and expanded hedge-fund regulation.
The regulation of hedge funds and tax havens is German Finance Minister Peer Steinbrück's pet issue. But the Americans remain skeptical: Tax havens and hedge funds are considered token subjects to score points with European voters, rather than ideas to solve the financial system's structural problems.
Nevertheless, the German government is still counting on Obama to join the finance-reform movement at the G20 summit—not least because the City of London has taken the first step toward more regulation in a damning report released on Thursday by Lord Turner, Chairman of the UK's Financial Services Authority.
"Over the last 18 months," reads the Turner report, "…the world's financial system has gone through its greatest crisis for at least half a century, indeed arguably the greatest crisis in the history of finance capitalism." One reason for the crisis, it argues, is the long-cherished "theory of efficient and rational markets"—which can no longer be trusted to keep the economy safe, according to Turner.