The EU-US Divide Dim Prospects for Financial Reform Summit

When world leaders come together this weekend to discuss possible reforms to the global financial system, few expect many changes. Europe and the US have different visions for the future of finance.

By SPIEGEL Staff


The faucets dripped, the windows couldn't be opened and rain and snow came in through the roof and dripped down the walls. The Mount Washington Hotel in the small New Hampshire town of Bretton Woods was not in great shape when it served as the site of a conference on a new world economic order for 700 international financial experts shortly before the end of World War II. The 1944 meeting went on for three weeks in what one guest dubbed the "madhouse." Still, despite the sub-optimal conditions, by the time it had ended, the conference had agreed on the rules and institutions that would shape the international financial system for decades to come.

Leaders from G-20 nations will meet in the National Building Museum in Washington D.C. this weekend for a summit on the global financial system.
AFP

Leaders from G-20 nations will meet in the National Building Museum in Washington D.C. this weekend for a summit on the global financial system.

Now, more than six decades later, another world financial summit is set to take place this weekend. The world's 20 most important government leaders will meet on Friday in Washington D.C. to discuss a new fundamental reform of the financial system. In the wake of the crash in the credit markets, the billions in bailout packages put in place around the world and last week's warnings of a global recession, many governments have high hopes for sharper regulations in the global financial markets.

German Chancellor Angela Merkel called for "more transparency" and a "better set of rules." French President Nicolas Sarkozy proposed a significantly stronger role for the International Monetary Fund (IMF), currently headed by French politician Dominique Strauss-Kahn. A "new Bretton Woods," the French president said, must "lead to a new founding of capitalism."

Limited Prospects for Reform

These expectations, though, are unlikely to come to fruition. More than eight weeks after the collapse of the US investment bank Lehman Brothers, it is clear that prospects for profound and global financial reform are quite limited. In order to defend Wall Street's supremacy, the United States wants to remain the dominant force on the capital markets. The Europeans are deeply divided, once again. And even rapidly developing countries like China and India are only moderately interested in extensive restructuring efforts.

The global bailout.
DER SPIEGEL

The global bailout.

Indeed, it already seems clear that the new financial order will end up looking suspiciously like the existing one. A wave of new government interventions will be just as unlikely as the formation of additional international super-agencies in the mold of a global central bank. Furthermore, US President-elect Barack Obama will not be at the meeting, making it impossible to gauge the extent to which he might support reforms. It seems clear, however, that he will do what he can to defend the interests of the American financial industry.

The list of reform ideas that might be capable of receiving broad support, in any case, is quite short -- a reality that became clear as the meeting was being prepared. And it is the US which has done much of the preparing, having seized the reins in the run-up to the summit. Indeed, Brazil, which is the current holder of the Group of 20 (G-20) Finance Ministers, could easily have organized the conference. But the US assumed control anyway. Japan too, in its capacity as current head of the G-8, expressed interest in hosting the meeting -- but was ignored. Finally, Washington has benefited from European disunity, with the EU spending recent weeks embroiled in its usual debates over principles and ideals.

While some of the countries in the European Union support the US argument for relatively unfettered capital markets, French President Sarkozy, in particular, favored stronger government intervention. But the Europeans showed little interest in toeing the Paris line. There has been resistance to almost every idea that Sarkozy, the current holder of the rotating EU presidency, has come up with.

Sarkozy's Fervent Wish

The British and the Swedes, for example, found the specifications for individual financial products or markets far too detailed and the proposed rules to achieve better control of bank activities far too strict. Czech Finance Minister Miroslav Kalousek complained that it was "a revolution, not evolution" of the financial system. The Dutch torpedoed the French proposals with their own internal document. The Germans interpreted some of the wording in the French proposals as another attempt by Sarkozy to bring himself a step closer to achieving his fervent wish of gaining more political control over global -- or at least European -- finance markets.

In the end, it became clear that France would have to thoroughly revise the document outlining a common European position.

In response, Sarkozy served the 27 EU heads of state and government, who had come to the Justus Lipsius Building in Brussels for a meal of chicken and scallops last Friday afternoon, a slimmed-down version of his previously lofty plans. The document that the four EU representatives, from Germany, France, Great Britain and Italy, will present in Washington is more of a series of well-intentioned headings than a list of precise proposals. Under the EU document:

  • a code of behavior would protect the financial industry from excessive risks and, for example, would outlaw executive bonus payments that are based on short-term returns;

  • a minimum level of regulation and rules would be introduced, not just for hedge funds, but for all markets and territories, including tax havens;

  • an internationally networked system of monitoring major global financial institutions and an early warning system for detecting undesirable developments would help avoid future financial crises;

  • the role of the IMF as a global financial overseer would be strengthened.

The Brussels document represented an initial success for the US government, and yet even this most recent, watered-down concept still goes too far for Washington.

In lock step with its global financial industry, the US government is trying to structure the planned capital market reforms in accordance with the principles of cosmetic surgery. In other words, it wants everything to look new, while keeping everything the same beneath the surface.

The heads of Wall Street's major banks, like Goldman Sachs CEO Lloyd Blankfein, share the government's view. The financial crisis is "a once-in-a-century credit tsunami" says Blankfein. But for someone like him, the crisis is also little more than an uncomfortable accident that does not call the overall system into question. Laws are ineffective against accidents, and it just so happens that "risk taking," according to Blankfein, is the business model of banks. Anyone who rules out risk is destroying that business model. Such is the worldview of Lloyd Blankfein, a man who earned $68.5 million (€53.5 million) in 2007.

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