Europe expects to flex its muscle at financial summit

LONDON — After playing a key role in responding to the global banking crisis, European leaders head to Washington for a big global financial summit later this week with newfound confidence in their dealings with the United States, a vague set of principles and only a few specific reforms in their briefcases.

French President Nicolas Sarkozy, who has publicly criticized U.S. officials for financial decisions such as letting Lehman Brothers fail, hopes the summit will secure his legacy as an influential player on the world stage before France hands off the rotating European Union presidency to the Czech Republic in January.

Last week, he called for a follow-up to the two-day Washington summit, which begins Friday, within 100 days. But experts say reform of global financial regulation will be neither quick nor easy due to the complexity of the issues, the number of global players with a stake in the process, and the change of administrations in Washington. President-elect Barack Obama has said he won't attend.

Sarkozy and European leaders would like to build on the momentum they gained in crafting bank-bailout programs that served as models for U.S. reforms. But the four principles on which they agreed are vague, due to the difficulty in melding the positions of France and other countries that seek tight regulation, with that of Britain, which wants to avoid unduly restrictive positions.

The four principles:

  • No financial institution, no market segment and no jurisdiction must escape proportionate and adequate regulation or at least oversight
  • The international financial system must be based on principles of accountability and transparency
  • There should be an early warning system to warn against future financial crises
  • Warnings of potential financial crises will fall to the International Monetary Fund (IMF).
  • "I suspect the Europeans, under the table, have agreed the main principles with the Obama group or they wouldn't go ahead," said Emilios Avgouleas, a professor of international financial regulation at University of Manchester. He said the European principles would find little resistance from the U.S. Federal Reserve, but said he "suspects the Bush administration and the old guard will object to them." He included Henry Paulson, the current Treasury secretary, in his definition of "old guard."

    The EU leaders agreed on several specific suggestions. Europeans want greater oversight of credit-rating agencies, which have been criticized for conflicts of interest in dealing with the companies they rate, codes of conduct to avoid excessive risk-taking; a greater role for the IMF in monitoring financial systems and helping countries in difficulty and finally a review of current "fair-value accounting" practices, which assess values every quarter even if they have long maturity dates.

    Mark English, an EU spokesman, said "there was a huge amount of consensus, probably more than at any time in the past" among the European leaders. Sarkozy, British Prime Minister Gordon Brown, who has called in recent weeks for a "Bretton Woods II" summit on global financial reform, and German Chancellor Angela Merkel spearheaded the discussion. Brown reiterated the call for reform of global financial systems, including the need for a global "early warning system," during a speech Monday night.

    Philip Whyte, an economist at the Center for European Reform in London, noted that the fair-value accounting rules have been blamed for "exacerbating the crisis by forcing banks to sell assets."

    Whyte called the Europeans' heavy emphasis on regulation to resolve or avoid future financial problems "a bit simplistic." In his view other factors contributing to the current crisis, such as the big surpluses in countries like China, need to be addressed.

    "They stand in relation to the Americans and British as a drug dealer stands in relation to a drug addict," he said of China. "They supplied the liquidity".

    Manchester's Avgouleas also voiced some doubts about the European approach to regulatory reform. "They want to build a system for global financial regulation with old material" and institutions such as the IMF, he said. "I'm not sure whether that will work." He sees the primary challenges to rapid and comprehensive change as being two-fold: political will, and the need for "substantial harmonization of national financial regulations" in the world's leading financial centers.

    London, for instance, which thrived as a financial hub for years due to relatively light regulation, could lose trading and income if regulations tighten or are more closely aligned with those elsewhere in Europe.

    For all the talk of a globalized approach, for now the regulation of finance remains a largely national responsibility.

    (Sell is a McClatchy special correspondent. Kevin G. Hall contributed)


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