By Tony Czuczka and Edwin Chen
April 2 (Bloomberg) -- German Chancellor Angela Merkel and French President Nicolas Sarkozy called for tighter rules on financial markets, widening a rift among leaders after President Barack Obama urged unity to counter a global recession.
With the Group of 20 summit convening today in London, the European leaders pressed their case, in contrast to Obama’s view that there will be “enormous consensus” to overcome the deepest economic slump since World War II.
“Germany and France will insist that our intentions don’t just remain statements but that they become reality,” Merkel said at the news conference in London yesterday. “We want results, but we don’t want results that have no effect in practice.”
A failure to reach consensus would deal a blow to the summit’s aim of identifying ways to end the recession and prevent a repeat financial collapse that caused it. At the top of the agenda is a common regulatory framework to rein in hedge funds, derivatives trading, executive pay and risk-taking. Nations remain divided about how much stimulus is required as well as about naming tax havens and a new global rulebook for banks.
“It’s not at all clear why Sarkozy and Merkel are making such a show,” said Morris Goldstein, a former economist at the International Monetary Fund and senior fellow at the Peterson Institute for International Economics in Washington. “On regulation, the differences really aren’t that big.”
Geithner’s Effort
U.S. Treasury Secretary Timothy Geithner wants to bring hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic-risk regulator would have power to force companies to increase their capital or cut their borrowing, and authorities would be able to seize them if they came unstuck.
“There is a very strong consensus for broader, stronger, higher standards so the world never faces a crisis like this again,” Geithner said in a Bloomberg Television interview yesterday. “The approach that all these countries are going to come together and support is that we agree on higher common standards for oversight.”
The eve of today’s summit was marked by protests in central London’s financial district. Demonstrators clashed with police outside the Bank of England and broke into a Royal Bank of Scotland Group Plc branch. Police in riot gear, on horseback and with dogs moved in to surround demonstrators who smashed windows and entered the RBS branch near the central bank.
Among the leaders, agreements may founder on details as the Europeans pressed for as many specific agreements as possible.
‘Lay the Foundation’
“It’s time to lay the foundations of regulation in the 21st century,” Sarkozy said, adding that tougher regulation is “non-negotiable.”
Merkel, who faces elections in September, said the summit is a “unique chance” to “thoroughly” change the financial system. “That’s why we’re being a bit tough,” she said.
The leaders will agree to regulate large hedge funds and “avoid competitive devaluations” of their currencies, Reuters reported today, citing a draft communiqué.
Merkel said several drafts of the summit conclusions are in circulation, and that work still needs to be done to clinch a final agreement.
Sarkozy said the summit draft doesn’t do enough to crack down on tax cheats. His finance minister, Christine Lagarde, said that he’d walk out of the summit if his push for stricter regulation is rebuffed.
Last Minute Fight
“In the current state of things, the proposals don’t suit France or Germany,” Sarkozy said on Europe 1 radio. “No agreement is secured. I know by experience that we will need to fight until the last minute.”
The disagreements may force the leaders to paper over differences with a watered-down agreement. Expectations “are being managed down,” Stephen Roach, Morgan Stanley’s Asia chairman in Hong Kong, said in an interview.
“There seems to be no real appetite for the leaders to deal with the imbalances in a broader global economy or their own individual economies,” Roach said. “This is not going to be a breakthrough summit.”
The deepening slump has led to a split over how much governments need to spend to reverse the tailspin. Germany and France have led a European Union response that the 400 billion euros ($530 billion) the EU has approved should be enough and any more would drive debt too high.
The recession has worsened since the G-20 leaders last met in November in Washington.
Slump Forecast
The Organization for Economic Cooperation and Development said in Paris that the economy of its 30 members will contract 4.3 percent this year and predicted unemployment in the Group of Seven will reach 36 million late next year. The World Bank lowered its growth forecast for developing countries this year by more than half to 2.1 percent.
“The only thing I wish for is that all the presidents gathered here have the maturity to understand the every day that passes without a solution to the crisis, more people are going to suffer,” Brazilian President Luiz Inacio Lula da Silva told reporters after arriving in London.
To contact the reporters on this story: Edwin Chen in London at echen32@bloomberg.net; Tony Czuczka in London at aczuczka@bloomberg.net
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