Lew Will Push EU to Avoid Race to Bottom on Finance Rules

U.S. Treasury Secretary Jacob J. Lew
Jacob "Jack" Lew, U.S. Treasury secretary. Photographer: Andrew Harrer/Bloomberg

Treasury Secretary Jacob J. Lew will press European officials to follow the U.S. lead in adopting tougher banking regulations to ensure that American financial firms aren’t put at a competitive disadvantage.

Lew visits France, Germany and Portugal starting today after U.S. regulators completed so-called Volcker Rule restrictions on proprietary trading last month, one of the final steps of stronger banking oversight following the 2008 crisis. Lew has said the global economic community must avoid a “race to the bottom” so that banks don’t concentrate operations in countries with weak financial rules.

“This is an area where he can talk tough and he should,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. “The Europeans will recognize that they actually have quite a bit of homework to do on this issue.”

Obama administration officials want European banks to lend more to bolster economic growth in the 18-nation currency bloc, avoid disinflation and fuel demand for products of U.S. companies such as General Motors Co. and Guess? Inc.

The U.S. trade deficit with the three countries on Lew’s itinerary widened 17 percent through October last year from the same period in 2012, reflecting weak euro-area growth. Now, after two years of contraction, European economies are showing the strongest momentum since Lew took office in February 2013, an improvement he wants to ensure isn’t squandered.

Growth Risk

“The overriding message that Mr. Lew wants to convey to his European counterparts is: do whatever you can to ensure that your economic recovery gathers pace and is a durable one,” Nicholas Spiro, managing director of the investment consultancy Spiro Sovereign Strategy in London, said by e-mail. “There’s still a significant risk that what little growth there is in the euro zone gets snuffed out.”

Banks are one area of concern. The European Central Bank is leading a review of the euro area’s most prominent lenders, from Banco Santander SA to ABN Amro Bank NV, details of which are due to be released at the end of January. European Union-wide stress tests in 2010 and 2011 were criticized for failing to reveal deficiencies even when balance sheets were pitted against a range of hypothetical, negative events.

Lew is likely to discuss the financial regulations in his meetings with French President Francois Hollande and Finance Minister Pierre Moscovici in Paris today, as well as talk with business leaders separately. In Germany tomorrow, he’s scheduled to meet with Finance Minister Wolfgang Schaeuble.

Banking Unity

The Treasury secretary will also seek further progress on banking unity, including recapitalization capacity and credible deposit insurance, and will emphasize the need for increased lending in the region, a Treasury official told reporters on a Jan. 3 conference call.

In Germany, Lew will draw the attention of the new government to the issue of the growing current-account surplus, which increased to more than 7 percent in the first half of 2013, boosting the euro area’s imbalance to more than 2 percent, according to the Treasury’s October report.

Lew will most likely push Germany to increase public investment as a way to boost demand and reduce its imbalances, Kirkegaard said.

The Treasury criticized Germany’s “anemic” domestic demand growth in the October report, pointing out that in 2012 its nominal current-account surplus was larger than that of China as a share of GDP. While the International Monetary Fund backed U.S. criticism, Germany responded by saying that such surpluses are a sign of the competitiveness of the nation’s economy and global demand for its products.

Capital Requirements

Discussions about the financial regulations might touch on issues including European plans for a banking union, capital requirements for international lenders that are active around the world and incorporated in the U.S., and the overseas reach of the Commodity Futures Trading Commission’s swap rules, analysts said.

“The treatment of international banks that are active across the world, and particularly in Europe and the U.S., will probably be one of the most important topics of the discussion,” Kemal Dervis, vice president and director of the Global Economy and Development Program at the Brookings Institution, said in a phone interview from Washington.

While pushing for swifter action by European officials, Lew might find himself on the defensive about the debate in Washington over raising the federal debt limit.

Budget Standoff

Lew warned Congress that the U.S. will exhaust its borrowing authority as soon as late February and urged lawmakers to raise the debt ceiling weeks before then. The last standoff on the issue ended on Oct. 17, the day Lew had said the U.S. would exhaust its borrowing authority. President Barack Obama signed legislation to suspend the debt ceiling until Feb. 7 and end a 16-day partial government shutdown.

After Congress reached a deal over 2014 funding and the Federal Reserve announced plans to taper its bond buying program, IMF Managing Director Christine Lagarde said the fund will raise its forecast for U.S. economic growth in 2014 from 2.6 percent it predicted in October.

That outlook put euro-area growth at 1 percent this year, following contractions of 0.4 percent in 2013 and 0.6 percent in 2012.

The lackluster performance is hurting some U.S. businesses. General Motors is pulling its Chevy brand out of Europe after its “unacceptable” financial performance in the region. Guess?, a Los Angeles-based clothing retailer; HJ Heinz Co., the ketchup maker taken private last year by Warren Buffett’s Berkshire Hathaway Inc.; and General Mills Inc., the Minneapolis-based maker of Cheerios cereal, all reported declining sales in Europe in the most recent quarter.

Portugal’s Rescue

In Lisbon, Lew will show support for Portugal’s implementation of its rescue program in meetings with Portuguese Prime Minister Pedro Passos Coelho, Deputy Prime Minister Paulo Portas and Finance Minister Maria Luis Albuquerque, the Treasury official said.

While Portugal emerged from its longest recession in at least 25 years in the second quarter of last year, Coelho still has to trim spending by 3.2 billion euros ($4.36 billion) in 2014 to meet targets in the country’s EU-led aid plan after relying mostly on tax increases last year. The prime minister is trying to regain full access to debt markets with the end of a 78 billion-euro bailout approaching in June.

This will be Lew’s fourth visit to Europe since he took office. His previous trips included meetings in the U.K., France, Germany, Belgium, Russia and Greece.

“This visit is a sign that Europe is still under close monitoring by the administration as it continues to pose a systemic threat to the world economy,” said Domenico Lombardi, a former IMF board official who is now the director of the Global Economy program at the Waterloo, Ontario-based Centre for International Governance.

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