Merkel calls for tough steps on regulation (AP)

Thursday, May 20th, 2010 | Finance News

BERLIN – German Chancellor Angela Merkel urged the world's economic powers to send a "signal of strength" by agreeing to stronger global financial regulation, tough words that did not dispel market doubts about whether she and other European leaders have a handle on the continent's debt crisis.

European stocks and the euro slipped Thursday, unnerved by a unilateral German move to ban some speculative trading practices. That was taken by some as a sign Merkel and other European leaders are not coordinating their efforts to shore up government finances in the 16 countries that use the euro, despite their agreement on a $1 trillion loan backstop for governments in danger of defaulting.

The package has given markets respite from fears of immediate collapse, but long-term worries about the European economy continue to depress sentiment. Britain's FTSE 100 was down 2 percent, while Germany's DAX slid 2.3 percent and the CAC-40 in France was 2.9 percent lower. The euro sagged 0.8 percent to $1.2325, well down from $1.51 late last year before debt worries intensified.

Merkel recalled that, at the height of the global financial crisis in 2008 when governments had to plow billions in taxpayer money into propping up banks and other financial institutions, the Group of 20 rich and developing nations agreed "every product, every actor and every financial center must be regulated — we promised people that."

"Now, after one and a half or two years, people are saying: what came of that?" she said. "At some point we have to provide the proof and say, 'come here, we've done it.' This point shouldn't be too far away."

"My appeal is: let us send a common signal of strength at the G-20 summit" in Canada next month, Merkel said at a conference on regulation.

Across Europe, leaders have shown an increased resolve to regulate in response to the global financial turmoil of the past several years, which recently has centered around fears of government default in Europe.

On Tuesday, EU governments overrode British objections and U.S. worries to tighten rules for hedge funds, and Germany's securities regulator unilaterally announced curbs on traders of government debt and bank stocks.

Germany's trading limits, however, took markets by surprise, and unsettled investors. It was interpreted by some as a sign that European leaders were not united in their approach, and that Europe's underlying problem was too much debt, not market practices.

Europe's top trade official said in Stockholm that the practice should be regulated on a European rather than national basis. "I fully encourage European governments to adopt this kind of governance and regulations, to adopt such a decision at a European level, not on unilateral basis," Competition Commissioner Joaquin Almunia said.

Investors didn't like it.

"The question of EU unity following Germany's unilateral naked short-selling ban has investors particularly on edge, along with concerns on the sustainability of the European rescue package and the potential dampening effect that fiscal tightening could have on global growth," said UBS analyst Geoffrey Yu.

Merkel, leader of the eurozone's largest economy, has stepped up calls for tighter regulation of the financial sector as Germany and its European Union partners assemble a $1 trillion eurozone rescue package aimed at containing the continent's crisis over heavy amounts of government debt.

The rescue package remains unpopular with German voters who object to paying for other countries' mistakes, and Merkel is now emphasizing world leaders' promises to respond with new rules to prevent more financial turmoil — and arguing that market misbehavior has made the current trouble worse.

In response to the global economic crisis, the G-20 — which combines traditional leading industrial nations with rising powers such as China and India — has been designated the key forum for economic coordination among countries.

Merkel has pushed hard to shape the agenda as Europe struggles to cope with market fears that governents will not be able to pay their debts. She insisted on tough conditions for a joint EU bailout of Greece, and called for new rules to prevent governments from undermining the euro with reckless spending, saying violators should be kicked out of the euro.

Germany earlier this year also announced plans for a levy on banks, which would pay into a fund to cover the costs of future financial crises. Merkel this week has advocated some form of financial market taxation, perhaps on transactions.

She urged counries that have been unenthusiastic about tighter rules to recognize the need for them. Canada, Australia and Japan have argued that their banks didn't suffer massive failures and therefore shouldn't have to bear the burden of new taxes.

With European and even U.S. backing for the idea of a bank levy, "if there are again three countries that say, 'but we're not affected by that,' then that's extremely frustrating and ultimately can't move us forward,'" she said.

Tiff Macklem, a deputy Canadian finance minister, argued at the same Berlin forum that there was no "one-size-fits-all solution" to that particular issue.

Chin Dong-soo, the chairman of the Financial Services Commission in South Korea — which currently holds the G-20 presidency — also underlined the sense of urgency.

He said that "the market hates uncertainty; therefore we need to expedite decision-making on the key financial regulatory reform issues."

South Korea was relatively unscathed by the financial crisis, and so does not have "a direct vested interest in certain financial regulatory reforms," he added, making it well-suited to the role of "honest broker."

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