The World from Berlin Europe Wants Greater Financial Safety Net

Leaders from the European Union's biggest economies gathered in Berlin on Sunday and expressed support for greater oversight of the world's financial markets. German Chancellor Angela Merkel also declared war on tax havens. Commentators say they'll believe it when they see it.

The global finance summit may still be more than a month down the road. But Europe this weekend made it clear exactly what it expects when leaders from the world's top 20 economies, the so-called G-20, gather in London on April 2: a radical increase in global market regulation.

European Union leaders gathered in Berlin on Sunday to find a common position on international financial oversight.

European Union leaders gathered in Berlin on Sunday to find a common position on international financial oversight.

Foto: Getty Images

The agreement was the product of a weekend meeting in Berlin which saw the leaders and finance ministers of European G-20 members meet to come up with a unified position ahead of the spring meeting. "It is important that both the people and the markets see that policy-makers have learned from the crisis," German Chancellor Angela Merkel said.

One of those lessons, European leaders said on Sunday, is that oversight of various financial products must be improved. "All financial markets, products and participants -- including hedge funds and other private investment groups that represent a systemic risk -- have to be covered by an appropriate oversight or regulation," the group decided, according to a posting on the Chancellery Web site.

In addition, Merkel and her colleagues vowed to go after offshore tax havens. Merkel argued for a "mechanism of sanctions" to deal with those countries or territories which prove uncooperative in the fight against tax evasion. The gathered leaders also proposed that funding for the International Monetary Fund be doubled to €500 billion ($643.6 billion) so that the organization has more capital available to help members in need. Furthermore, Europe is calling on banks to build up equity in boom times to provide a cushion during downturns.

Merkel, French President Nicolas Sarkozy and British Prime Minister Gordon Brown were joined by leaders from Italy, the Netherlands, Spain, the Czech Republic and Luxembourg. The European Central Bank and the European Commission were also represented.

"We can't afford failure in London," French President Nicolas Sarkozy said on Sunday. "We have to succeed and we cannot accept that anyone or anything will get in the way of this summit. ... If we fail, there will be no safety net."

The meeting came as economic clouds continue to darken in both the European Union and around the world. A forecast released by Deutsche Bank on Monday predicts that the German economy will shrink much further than expected. The bank's chief economist, Norbert Walter, expects Germany's gross domestic product to shrink by 5 percent, according to a report in the Monday edition of the tabloid Bild.

And, he made clear, it could be worse. "The German economy will shrink by only 5 percent in 2009 if we see a turnaround in the second half of the year," he said. If no such turnaround materializes, "then greater shrinkage can no longer be ruled out." The German government forecasts a shrinkage of 2.25 percent.

German commentators on Monday examine the economic intentions of European leaders.

The center-left daily Süddeutsche Zeitung writes:

"One can doubt whether the good will shown by Merkel and Finance Minister Peer Steinbrück will be enough to fundamentally renew the finance system. The problems on the global capital markets are large; they don't come from just a few meaningless things having gone wrong. No, this system ... has developed into a monster. And a monster cannot be controlled with a couple of nice speeches. A monster needs chains that limit its movements. As such, the proposals made by Merkel and Steinbrück this weekend at the EU summit in Berlin took steps in the right direction, but some don't go far enough or are too nebulous."

"Real reform of global finances will fail if the G-20 states, at their summit in London, don't do three things. First, in the future no derivative, no certificate and no finance instrument can be allowed without first being approved by a national or international agency. Second, financial firms should no longer be allowed to undertake any business activity that doesn't appear in their books. The shadow banking system that has developed in recent years in parallel to the normal banking system must be made to disappear. Third, all tax havens must be closed down. There should no longer be any regions in the world where no taxes are collected and where there is no financial oversight."

The center-right daily Frankfurter Allgemeine Zeitung writes:

"The call for more transparency and more control over participants in the financial markets may very well be justifiable. But one should recall that the current crisis did not result from a lack of data. Everything that is being complained about today was known: the current accounts imbalance, the pyramids of credit held by the banks, the trade with complicated securities, the bonuses paid to bankers. Earlier, though, no one complained about such things -- indeed, they were considered chic. The British journalist and economist Walter Bagehot once wrote 'all people are most credulous when they are most happy.' That will remain true even after strict regulations are passed."

The Financial Times Deutschland looks at what European financial oversight should look like in the future:

"Financial oversight on a strictly national level is no longer contemporary. Global financial markets make it an absolute necessity to establish cross-border controls. In the mid-term and long-term, there is simply no way to avoid an integrated system on a Europe-wide -- or better yet, worldwide -- basis. Such a system cannot, indeed should not, be responsible for every small institution; indeed, the micro-level can (remain the responsibility of the nation-states). But for the larger institutions, there is no way around a collective supervision."

"So far, many attempts in this direction have failed because they would mean a loss of power for national authorities. As with the unified currency and monetary policy, it will take time to overcome such hurdles. It will, however, become problematic should national egotism lead to limitations on the amount and quality of information that is exchanged across borders, especially should such shortcomings result in an inaccurate pictures of risks faced by financial institutions acting on a global scale."

"The necessary change in mentality must also include an increase in courage among overseers, particularly when it comes to identifying risks. Without question, there is a danger that such warnings can unleash a crisis. But instead of listing all conceivable risks in financial reports hundreds of pages long, it would be helpful were it made clearer where the central risks are to be found."

-- Charles Hawley; 1:00 p.m. CET