When the leaders of the G20 nations met in Washington in November to face down a grave economic crisis that imperiled them all, the air was filled with promises of a new era of global regulation intended to match a new era of global risk.
Almost five months later, those risks look greater than ever. But it is a measure of the growing strains over how to manage the global contagion — for which much of the world primarily blames the US — that the world’s major and emerging economic powers cannot agree on whether redesigning a system created in 1944 should be priority No. 1.
In recent days, the White House has begun signaling that when leaders of the G20 nations meet in London next month, the most pressing issue should be doing more to stimulate their economies through tax and spending policies — something that Obama can assert that he has already accomplished.
The major European nations, divided among themselves over the wisdom of taking on more debt to combat the global downturn, remain more interested in focusing on a new approach to financial regulation, the issue that they say sits at the heart of the crisis.
At its simplest, this is a philosophical divide about the European preference for more control over markets, even to the point of creating international regulators who can reach across national borders, and an American fear of gradually diminishing sovereignty over its own institutions.
But it is also a test for US President Barack Obama. He is batting away conservatives who claim he is shifting the US too far to the left, while placating allies who fear that for all his talk about practical solutions, he mostly wants to goad them into spending more to save the fragile nations of eastern Europe.
It is too early to know whether all this will be papered over as the Europeans prepare for Obama to arrive in Europe for the first time since, as a candidate, he drew hundreds of thousands into the streets of Berlin.
The mood in Germany in particular is souring. German Chancellor Angela Merkel talks about using the moment to enact what she calls “crucial” reforms. At the same time, the Germans say their modest stimulus package, about 50 billion euros (US$63 billion), less than a 10th of what Congress passed last month to help the US economy, is quite enough for now.
The French seem to be siding with the Germans, as do the Japanese, who are so debt-laden that they do not want to run up even bigger deficits. British Prime Minister Gordon Brown appears to be leaning toward Obama’s position that governments ought to spend first and regulate later.
“There ought to be some low-hanging fruit we can all agree on,” Democratic Senator John Kerry, chairman of the US Senate Foreign Relations Committee, said on Monday.
He spoke after a week of consulting with foreign leaders and hearing European complaints that the US started this and now are less interested in creating the rules to prevent a repetition.
For his part, last Friday, Obama told the New York Times that “part of what you’re seeing now is weaknesses in Europe that are actually greater than some of the weaknesses here, bouncing back and having an impact on our markets.”
Inside the White House, officials insist that this is a difference of emphasis, not of fundamental approach. They see no threat to the love-fest between Obama and the Europeans who celebrated the departure of former US president George W. Bush two months ago.
Yes, officials concede, they have been overwhelmed by the succession of crises that have hit at once — the rapid disintegration of banks that required more capital injections, an auto industry bailout that many inside the administration suspect may be too late to save General Motors and the accelerating market meltdown.
But they insist that after urging coordinated spending sprees, coming up with a plan for eastern Europe and other vulnerable economies and beating down protectionist-sounding legislation that has cropped up around Europe, reforming the global regulatory system is next on the to-do list.
“There will be fairly detailed recommendations and principles coming out of the working groups” at the April summit, one senior official who has been deeply involved in that process said on Monday.
Among them, others said, were likely to be new rules to limit off-shore banking operations and discussions about how much hedge funds and private equity groups must open their operations to public examination.
Investors have heard similar promises before. In the aftermath of the Asian economic crisis of the late 1990s, the Clinton administration pressed a series of measures through the G7 industrial nations, arguing that many elements of the collapse of Asian markets could have been avoided had regulators been more experienced, corruption less rampant and risks more transparent. But the enthusiasm quickly waned and by the time Bush took over, those summits became much more about terrorism than about setting common rules for the global economy.
This time it could be different — the downturn is much sharper, its effects much more broadly felt. But the divide over how to regulate markets is deep. The US and Britain, the world’s two biggest financial centers, will almost reflexively resist efforts to subject themselves to global regulators.
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