EU Pushes for Overhaul of Post-World War II Financial System

By James G. Neuger and Mark Deen

Oct. 16 (Bloomberg) -- European Union leaders pressed for an overhaul of the global financial system to prevent a repeat of the credit crunch that sparked the biggest stock-market selloff since the Great Depression.

EU leaders called for a global summit as soon as next month to rewrite the 1944 Bretton Woods accord that paved the way for Europe's post-World War II reconstruction and set up the institutions that oversee the world economy today.

``We had the emerging market crisis, we had the Internet bubble, now we have this massive crisis,'' French President Nicolas Sarkozy told reporters after chairing the first session of an EU summit late yesterday in Brussels. Europe insists on the ``re-foundation of the international financial system.''

The European initiative is likely to face headwinds from the U.S., which has used its dominance of international financial institutions to promote a brand of capitalism that has come into at least temporary disrepute.

``The U.S. got what it wanted in 1944 and, I suspect, will do so again simply because the Europeans won't be able to decide what they want,'' said Martin Weale, director of the National Institute of Economic and Social Research in London.

President George W. Bush ``definitely'' favors holding a Group of Eight meeting before the end of the year, White House spokesman Tony Fratto said in Washington. European governments pressed for a wider summit, including leaders of developing economies such as China, India, Brazil and South Africa.

EU Presidency

To jumpstart that process, Sarkozy, holder of the EU's six- month presidency, will travel with European Commission President Jose Barroso to the U.S. on Oct. 18 to meet Bush.

Separately, concern mounted that the banking crisis will drag down the broader European economy, where business and consumer sentiment had already slumped to the lowest level since the September 2001 terrorist attacks in the U.S.

``This financial crisis is starting to have an impact on consumers and companies,'' Barroso said.

While stressing a global approach to regulation, European governments are split over how to go about it, with leading countries --including Britain -- traditionally opposed to handing over business regulation to outside authorities. Calls for a single financial supervisor in Europe continued to get little traction.

Proposals for stiffer regulation floated by EU leaders yesterday included more international supervision for cross-border banks, a global ``early warning'' system for crises, a revamp of the International Monetary Fund, tougher regulations on hedge funds, new rules for credit rating companies, limits on executive pay and punishments for excessive risk-taking.

EU leaders will set up a financial crisis taskforce to improve coordination among the bloc's 27 governments, and endorsed an end of ``mark-to-market'' accounting to maintain a level playing field with the U.S.

Gordon Brown

U.K. Prime Minister Gordon Brown, author of the British bank- bailout plan that was copied across Europe and in the U.S., called for an end-of-year deadline to place each of the world's top 30 banks under the supervision of a panel of regulators from the countries where it is active.

``We now have global financial markets, but what we do not have is anything other than national and regional regulation and supervision,'' Brown said.

Treatment of tax havens such as the Cayman Islands and Monaco may be overhauled as part of any new global financial framework, Sarkozy said.

``It will be part of discussions Saturday in Washington,'' the French leader said. ``Will we continue to work with tax havens? It's a valid question. We've passed into a new era. It's a question we'll put on the table and immediately.''

EU governments initially reacted to the crisis in a ``piecemeal and ad hoc'' fashion, ``creating an impression of disorder and sending confused signals to financial markets,'' aides to Barroso said in a paper prepared last week and released yesterday.

European Leaders

In the meantime, European leaders have committed as much as $2 trillion to guarantee interbank lending and buy stakes in banks, to prevent hobbled credit markets from tipping the broader economy into recession.

The U.S. followed suit, announcing an unprecedented $250 billion government investment in banks, starting with nine institutions deemed critical to the survival of the system.

Growing doubts that the bailout will keep the U.S. out of recession hammered U.S. stocks, leading to the steepest plunge since the crash of 1987.

``There needs to be a new Bretton Woods,'' Italian Prime Minister Silvio Berlusconi said. ``The consensus is very strong and it keeps growing stronger.''

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Mark Deen in Brussels at markdeen@bloomberg.net