The renewed stress on regulation in a joint letter signed by French President Nicholas Sarkozy and German Chancellor Angela Merkel reinforced European reluctance to spend more public money to smother the economic crisis.
The United States, Japan and China have by contrast maintained that additional stimulus spending is necessary to boost demand and spur growth. At the same time the two leaders said that members of the European Union had to commit themselves to the EU’s Stability and Growth Pact, which requires them to respect limits on deficit public spending.
“We are determined to achieve from the London summit concrete results for the reinforcement of international financial regulation,” Sarkozy and Merkel wrote in a letter to the EU’s Czech presidency.
They said that the G20 summit, to be held April 2 near London, should produce an “action plan” on financial regulation that would be monitored by the International Monetary Fund and the Financial Stability Forum, a Basel, Switzerland-based group of national finance authorities.
“The European Union,” the leaders added, “should propose that hedge funds and other funds susceptible of creating systemic risk be registered, regulated and appropriately supervised.”
The April 2 summit is set to debate reforms to the international financial system in the face of the global economic crisis. G20 finance ministers who met in Britain last weekend to prepare the summit said their countries would take “whatever action is necessary” to reverse the world economic slowdown.
But US appeals for governments in other leading economies to pump more public money into economic stimulus packages have been received coolly by Germany, France and other states that see tighter regulation as the solution.
Sarkozy and Merkel in addition insisted that EU members commit themselves to respecting the Stability and Growth Pact, which requires them to hold their annual public deficits to 3.0 percent of output and to aim for surpluses in times of growth.
“Excessive public indebtedness threatens long-term global stability,” the letter said. “Healthy public finances thus remain crucial for the credibility and stability of the European Union.”
Acknowledging that EU governments “must deal with growing challenges, we must renew our commitment to return as quickly as possible, in accordance with the pact and the pace of economic recovery, to our medium-term budgetary objectives,” the letter said.
In the current economic downturn, France is among six countries targeted by the EU executive commission for running up deficits in excess of 3.0 percent. The six have been served “excessive deficit reports,” the commission’s first move toward seeking more fiscal rigour and possible economic penalties under the Stability and Growth Pact.
Sarkozy has responded to the economic crisis with a huge spending programme, but the stimulus has so far failed to stem job losses while breaching the EU deficit limit.
France’s public deficit is expected to this year to reach 5.6 percent of gross domestic product and will remain at 5.2 percent in 2010, according to the revised state budget forecast released earlier this month.
The French and German leaders also urged the EU to implement initial reforms by June this year to make Europe’s financial sector more stable and transparent.
“The European Union must move resolutely towards a European regulatory framework on the basis of the recommendations of the Larosiere group,” they argued, referring to a high-level committee that last month recommended the formation of two pan-EU bodies to improve financial supervision.