European Calls for Action: Push for Greater Financial Regulation Gains Steam

Europe is furious at Washington's failure to agree on a bailout plan, calling Congress "irresponsible." Increasingly, EU leaders feel the answer to financial instability lies in greater international oversight.

Do these London financial workers need more regulation?
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Do these London financial workers need more regulation?

Europe is worried. And angry. It didn't take long after the US failure to pass a $700 billion bailout package on Monday for responses to begin pouring in from capitals across the European Union. And most of them have been scathing.

American lawmakers "have taken leave of their senses," European Union Trade Commissioner Peter Mandelson said late on Monday evening in an interview with the BBC. "I hope that in Europe we will not see politicians and parliamentarians replicating the sort of irresponsibility and political partisanship that we have seen in Washington."

The European Commission as a whole echoed Mandelson, with spokesman Johannes Laitenberger telling reporters on Tuesday that "the turmoil we are facing has originated in the United States. It has become a global problem. The US has a special responsibility in this situation."

German Chancellor Angela Merkel also weighed in on Tuesday, urging the US Congress to take action. "The German government expects, as do I, that the United States of America will pass a bailout package this week, because that is a precondition for restoring trust in the markets," Merkel said. "That is of incredible importance."

But Europe has not been content merely to blast American lawmakers. With the effects of the growing finance crisis increasingly being felt in Europe -- leading to a number of countries having to step in to prevent the collapse of banks here -- many in the 27-member bloc would like to see a tighter system of international regulation.

In his Monday evening interview, Mandelsohn said that greater international oversight was needed and mentioned that Merkel, French President Nicolas Sarkozy and British Prime Minister Gordon Brown had all recently spoken with US President George W. Bush requesting that he call an international conference to discuss tighter regulations.

Strengthening international regulation of the finance markets is not a new idea. German Finance Minister Peer Steinbrück has long been calling for an international system that would strengthen accountability of traders, ban the practice of short-selling and harmonize stock market regulations in Europe.

Other ideas include those voiced by Peter Bofinger, a member of the German Council on Economic Experts, which advises Berlin on economic policy. He would like to require banks, insurance companies and funds across the world to be required to declare the origin of all liabilities and he wants to see private ratings agencies be jettisoned in favor of a more transparent, state-run system, among other proposals.

Sarkozy on Monday repeated his call for a meeting of world leaders "to set the foundations for a new international financial system." What that new system might look like according to the French president was outlined in a speech he gave last Friday in Toulon. "The idea of an all-powerful market which must not be constrained by any rules, by any political intervention, was mad," he said. "The idea that markets were always right was mad." He also said that self-regulation and laissez-faire capitalism "were finished."

But perhaps the most influential voice calling for a new system of market regulation comes from Dominique Strauss-Kahn, the head of the International Monetary Fund. Strauss-Kahn has made significant changes to the IMF since he took over in November 2007, but none is as ambitious as his goal of turning the institution into a global enforcer of financial standards.

"We can have national or regional authorities, such as the European Union for example, but we need a global guarantor, an institution which monitors standards," he said last Friday. The IMF, he continued, was "ready to do what is required if we are given the mandate." Should such a system not be set up and should national governments continue to bail out failing banks, "it will give the idea of bottomless pits … that the state will come to the rescue of incompetent managers and greedy speculators."

The IMF head says that he has widespread backing for such a plan -- including China, Brazil, France, Great Britain, Spain and Germany. So far though, the US has balked at such international regulation.

The European Union will be focusing on a more unified response to the bank crisis at its summit scheduled to take place two weeks from now. So far, countries faced with banks in crisis have followed an ad-hoc bailout approach, with governments in Belgium, Britain, France, Germany, Luxembourg, the Netherlands, Iceland and Ireland all having to help failing domestic banks in recent days.

IMF director Strauss-Kahn emphasized that before any sort of international regulation plan is broached, the current crisis must be stabilized. But afterwards, he said, "we will have to draw the necessary conclusions from what has just happened: we must closely regulate financial institutions and financial markets."

cgh -- with wire reports

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