Chancellor Merkel Speaks on Financial Reform 'We Can No Longer Stand Passively By'

On the eve of the financial summit in Washington D.C., Chancellor Angela Merkel told a German newspaper that it is time for systemic reform. Warnings that the state should stay out of financial markets, she says, are unwelcome.

How radically is the world ready to change the global financial markets? That is the question many are asking on Friday as heads of state and government from the world's 20 leading economies head to Washington D.C. for this weekend's financial summit. And German Chancellor Angela Merkel, for her part, seems ready to push for far-reaching change.

German Chancellor Angela Merkel wants financial reform.

German Chancellor Angela Merkel wants financial reform.

In an interview published in the Süddeutsche Zeitung on Friday, Merkel said that she was expecting difficult negotiations -- talks, she said, which would last far beyond this weekend's meeting. But it was time, she told the paper, for greater oversight on the financial markets. "For a long time, we had a situation where very few understood the risks aside from those who wanted to earn money from (complicated new financial) products," Merkel said. "That won't happen again; that can't be allowed to happen again."

To make sure that it doesn't, Merkel is heading to the US armed with a sheaf of proposals and ideas developed for her by a team of Germany's leading economists, headed up by Otmar Issing, the former chief economist at the European Central Bank (ECB). She is expected to float the idea of creating a global risk map which will collate national data on large bank loans and investments as a tool to identify concentrated risk. The paper also argues for greater transparency when it comes to ratings agencies and for complex, structured financial products. International oversight, Merkel says, must be strengthened.

Not everyone shares her view. Indeed, US President George W. Bush warned on Wednesday against turning away from free market principles, saying the world "should fix the problems we have rather than dismantle a system that has improved the lives of hundreds of millions of people around the world."

And earlier in the week the influential Institute of International Finance (IIF), a global association of banks, issued a press release urging "that financial systems should be restored to a private sector footing, on a competitive market basis, as soon as circumstances allow."

Merkel's interview with the Süddeutsche was conducted prior to Bush's comments, but she made it clear that warnings such as those from the IIF are unwelcome. "With the state just having jumped in to prevent (the financial crisis) from becoming worse, I have no patience for those who would warn of too much regulation and state influence," she said. "It was certainly not my dearest wish that the state become a stakeholder in private banks."

The German chancellor took care to recall that Germany has long supported greater regulation on the international financial markets. "During our G-8 and EU presidencies in 2007, I made financial markets and the need for greater transparency an international priority -- at a time when not all of our partners saw the urgent need for reforms," Merkel said.

She also praised the social market economy for its having brought prosperity to Germany. "The market wasn't left to its own devices, but was guided for the good of the society on the whole." She continued: "The excesses on the financial markets have now shown us the kind of damage that can occur when such guidance is missing on the international level."

In Washington, Merkel is expected to demand greater oversight of offshore tax and regulation havens as well. "We can no longer stand passively by as individual small countries attract financial institutions by ignoring internationally agreed-upon rules."

Finally, Merkel pointed out that it is time for those in the industrialized world to begin living within their means. Specifically, she said, "the growing mountain of international debt is a constant danger." When asked if she were referring to the US, she demurred. "It's a problem that affects all of us. In any case, budget deficits of 10 or 11 percent of gross domestic product cannot be sustained on the long term -- especially not when consumers are heavily indebted."



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