Fault lines open in talks over global crisis fixes

John W. Schoen Senior producer • Profile • E-mail

There's widespread agreement among the world's biggest countries that the current global financial and economic crises require global solutions. But as leaders from twenty of those countries gather this weekend in London, that may be about all they can agree on.

The upcoming meeting is the last of a series of preliminary sessions before an April 2 summit that was called to try to reverse the downward spiral in the global economic and financial systems.

There’s little debate over the scope and urgency of the problem. And all parties have called publicly for a unified approach to economic stimulus programs, coordinated efforts to bail out the battered financial system and tougher, comprehensive rules to prevent the global financial system from running off the rails again.

When the time comes to work out the details, the limits of global harmony quickly become apparent.

“I think they’re pretty disunified,” said Simon Johnson, a professor at MIT’s Sloan School of Management and former chief economist at the International Monetary Fund. “But they don’t obviously want to present that too publicly.”

After months of preliminary work, several major fault lines have opened, largely between the U.S. and European countries, say analysts. The Obama administration, represented this weekend by Treasury Secretary Tim Geithner, has been pressing European countries to boost spending. For their part, the Europeans have been urging quick action on tightening financial regulations. 

Officials on both sides of the Atlantic have been teeing up the issues this week. On Tuesday Federal Reserve Chairman Ben Bernanke outlined the issue facing U.S. financial regulators, but pointedly lowered expectations for the April G-20 summit.

“I think it's asking too much for a meeting like that to come out with detailed proposals in many different areas,” he said.  

Bernanke focused much of his speech on the need for a more centralized approach to U.S. regulations that could more closely monitor increased risks to the entire financial system, not just the risks faced by individual banks. 

But so far, no one has figured out how to pull that off.

“The fact that the best idea they can come up with is a 'college of regulators' — which essentially means air miles for the regulatory industry — suggests that we are not seeing any coordinated action,” said Tom Vosa, head of economics research for nabCapital in London. “That’s not surprising because different countries have different histories of their banking system. The structures are entirely different.”

Given the complexity of those different regulatory systems — not unlike the multiple federal and state financial regulations in the U.S. —  it’s hard to envision a single global regulator with the sweep and authority to undertake the kind oversight being discussed, according to Sebastian Mallaby, a senior fellow at the Council on Foreign Relations.

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“This G-20 meeting in April 2 is not going to resolve financial regulation,” he said. “It’s just too difficult and too complicated. There’s been some noise from the Europeans saying,  ‘Gee, we’ve got to regulate hedge funds’ and so forth. That’s because they want to change the subject from the fact that they ought to have more fiscal stimulus.”

In response to U.S. calls for more government spending, the EU has said it is doing its part with a package that amounts to between 3 and 4 percent of Europe’s gross domestic product. The $780 billion amounts to about 5.5 percent of the U.S. GDP, but is spread over two years.

While the U.S. is expected to continue to urge European countries to spend more, that will likely be a tough sell. With the exception of Germany, Great Britain and France, most European governments’ finances are already stretched to the limit.

As the EU’s largest economy, Germany is expected to play a critical role in propping up  Europe’s economy and ailing banks. But analysts say that with lingering memories of the hyperinflation that gave rise to Nazi Germany, there’s a strong cultural aversion to easy-money policies. The current coalition government also faces an election in September that has dampened enthusiasm for a big spending package. 

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