U.S.-European Discord Could Hamper G-20 Financial Reforms

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G-20 summit in TorontoIncreasing signs of discord between North American and European countries are likely to lead to a fractious debate at the summit meeting of G-20 industrial countries taking place in Toronto this weekend. And that's likely to hamper their efforts to adopt international rules to reduce market risk.

In the latest example of trans-Atlantic bickering, German Finance Minister Wolfgang Schaeuble angrily rejected calls from the U.S. that Berlin drop a plan to slash its budget by $98 billion as part of deficit-cutting plan.

"While U.S. policymakers like to focus on short-term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation," Schaeuble wrote in Thursday's Financial Times.

"Addicted to Borrowing"

He was responding to pressure from President Obama and Treasury Secretary Timothy Geithner for countries such as Germany and China to stimulate domestic demand as a way of helping the global recovery. "We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession," Obama wrote to his G-20 colleagues last week.

But Schaeuble rejected that argument. "Governments should not become addicted to borrowing as a quick fix to stimulate demand," he said.

Another trans-Atlantic brouhaha appeared to be growing over whether to impose a tax on big financial institutions to help pay for all the money governments injected into banks at the height of the crisis in 2008.

Britain on Tuesday announced a $3.1 billion annual tax on banks, and France and Germany said in a joint statement that they, too, would impose a bank levy in coming months. Because the Great Recession began in the financial sector, said British Finance Minister George Osborn, "it is fair and right that in the future, banks should make a more appropriate contribution which reflects the many risks that they generate."

Obama had initially supported the idea of an internationally agreed bank tax, but he backed down in the face of Republican opposition. G-20 host Canada and Japan also oppose to the idea, suggesting that the issue will stymie efforts to reach agreement on more far-reaching financial regulation.

"Culture of Profit Maximization"

In a report on the G-20 reform process, Moody's Investors Services (MCO) warned that there seems to be "a weakening consensus among member countries about the content of the financial regulatory reform package and the pace at which it should be implemented."

The Moody's report also expressed concern that even if some reforms are agreed to in Toronto, "regulation is unlikely to change the culture of profit maximization, which will continue to have the potential to induce excessive risk-taking."

One of the measures being debated at the G-20 meeting is a new international standard for capital requirements -- the amount of money banks have to keep on hand to meet emergencies. The idea is to ensure that international banks face a level playing field so that no single country would obtain an advantage because its home nation has a lower capital reserve requirement.

Going in Different Directions

The G-20 leaders are also considering the adoption of a leverage ratio, which would set an international standard for how much money banks could borrow as a percentage of their capital. That would reduce risk.

But instead of reaching an international agreement in these issues, as originally hoped, many countries have decided to proceed unilaterally. For example, Obama has presented a sweeping financial reform package to Congress, which is in the final stages of approving the measure. The president wants to take the deal with him to Toronto.

"Not all countries will adopt and implement strictly identical policies despite the objective of international cooperation pursued under the auspices of the G-20," Moody's analyst Alain Laurin says. "This may trigger regulatory arbitrage and an unlevel playing
field."

One of the reasons for the bickering between Washington and Europe is that the U.S. economy is far more robust than Europe's. Estimates of U.S. GDP growth in 2010 are around 3%, while they're near zero for Europe.

A government debt crisis that started in Greece has spread to Spain, Portugal and even Italy, forcing the European Union to raise money to bail out any country that can't afford to pay its bills. That angered German voters, who believe that Greece and other deficit-ridden countries have long been living beyond their means and are now asking Germans to pay for their posh lifestyles.

Such are the political pressures each G-20 leader is under from home. And that's why it'll be so hard for them to come to truly global agreements.

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