Treasury Secretary Timothy Geithner this weekend will urge the finance ministers of 20 of the world's largest economies to mount a combined attack of robust fiscal stimulus against the global banking crisis. His European counterparts seem likely to respond by advocating early reform of international financial regulations. But neither initiative is likely to succeed, at least not soon.
The gathering of G-20 finance ministers is meant to set the stage for an Apr. 2 meeting of the countries' leaders in London. But a divide between the U.S. and many European members means the leaders will probably be forced to settle for a gussied-up declaration of shared goals, economists say.
The G-20 meetings come at a time of worsening economic news among its members. In recent reports, Germany's industrial production fell by 22.9% in January compared with the same month last year; France's dropped by 13.8%; and Britain's fell by 12.8%. Production in both the U.S. and Japan—the world's two largest economies—dropped by 10%.
The G-20 leaders appear largely to agree on the severity of the crisis, and that all of them need to pull together. But neither the U.S. nor Europe—in particular Germany—seems prepared, nor perhaps able, to budge much from solutions tailored to its own, domestic problems.
Pushing for a Common Goal
In a briefing to reporters on Mar. 11, Geithner said the U.S. would push all G-20 countries to adopt two-year fiscal stimulus programs equivalent to 2% of gross domestic product each year, a benchmark set by the International Monetary Fund. The stimulus package signed into law by President Barack Obama will be roughly 3% of U.S. GDP in each of 2009 and 2010. According to the IMF, only the U.S, Saudi Arabia, China, Spain, and Australia have hit the 2% mark for 2009.
Geithner said that effectively combating the crisis required "substantial and sustained actions."
"If we don't get the world working with us, we face the prospect of a deeper, longer-lasting recession," Geithner said. The gathering of G-20 finance ministers is being held on Mar. 13-14 outside London.
Geithner also proposed expansion of a $50 billion IMF emergency program for developing countries, to $500 billion. The U.S. would contribute about 20% of the total, or $100 billion, he said. The proposal corresponds with suggestions by some members of the European Union that the IMF increase its capacity to help, for instance, ailing countries in Eastern Europe.
Agreeing on the IMF?
By offering such a large chunk up front, said Brad W. Setser, an economics fellow at the Council on Foreign Relations, Geithner could boost the chances of successfully raising the fund. "I would certainly hope that the signal that the U.S. is willing to contribute would help the IMF raise money from a broad range of countries."
Simon Johnson, a former IMF chief economist and currently a fellow at the Peterson Institute for International Economics, said the G-20 leaders may find common ground on cooperation regarding the IMF. For instance, he said the Apr. 2 meeting could result in official endorsement of ending the current system of choosing the leader of the IMF and World Bank, and open up the competition to anyone from any country. Up till now, the IMF has always been headed by a European, and the World Bank by an American.
But Johnson doesn't expect agreement on the stimulus proposal "because many of the countries simply don't have the money."
On regulation, Europeans appear to be seeking a comprehensive overhaul of global financial regulation, including much tighter coordination across national borders. It isn't clear whether the Europeans—primarily France and Germany—are seeking to establish truly international regulators. But U.S. officials are deeply resistant to taking cooperation too far, specifically in allowing an international body to set the agenda. In addition, less than two months into the Obama Presidency and a new Congress, the U.S. is not ready to make strong commitments to particular regulatory reforms.
Congressional committees have just begun to hold hearings on derivatives regulation and establishing a "systemic risk" regulator, for example, and key committee heads say they hope to pass comprehensive legislation by late summer. Talking to reporters after a speech at the U.S. Chamber of Commerce on Mar. 11, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) predicted a single, sweeping bill rather than a series of legislative measures, at least in the Senate.
(That's not to say the Obama Administration hasn't tried to speed things up: According to Dodd, Administration officials initially asked him whether it was possible to produce a comprehensive reform proposal by Apr. 2. "No," he recalled replying. "I don't think so.")
More Detail to Come
So the U.S. will bring instead a series of principles to the G-20—similar to those outlined by Obama earlier in the year—calling for a systemic-risk regulator, tougher oversight of derivatives markets, and stronger bank capital requirements. Geithner promised more detail during testimony on Capitol Hill in about two weeks.
And while urging deeper international cooperation among regulators, Geithner said he will seek to do it by expanding the role of the Financial Services Forum—a network of regulators and international financial standards-setters that grew out of the Group of 7—and giving it more stature, but no actual regulatory authority, in establishing "best practices" for regulators around the globe. That could prove substantially less bold a move than Europeans want.
Geithner sought to play down reports of a division between the U.S. and Europe, saying he thought there was plenty of common ground. His comments echoed a statement to reporters earlier on Mar. 11 from Obama: "We've got two goals in the G-20. The first is to make sure that there is concerted action around the globe to jump-start the economy. The second goal is to make sure that we are moving forward on a regulatory reform agenda that ensures that we don't see these same kinds of systemic risks and the potential for this kind of crisis again in the future."
There isn't likely to be much disagreement on the broad principles of what to regulate—the breadth and depth of the current crisis has underscored regulatory weaknesses in all those areas. But scratch the surface, and long-standing differences between the U.S. and Europe are likely to flare.
Europeans are typically more eager to regulate private equity and hedge funds, while U.S. policymakers tend to be wary of regulating more than the largest, "systemically important" ones. (Indeed, they were long resistant to requiring big hedge funds even to register with regulators.) And in another contrast, the U.S. often pushes European regulators to get tougher with their banks, which can be much more highly leveraged than U.S. commercial banks.
In discussing the need for a systemic-risk regulator, Geithner voiced support for giving the task in the U.S. to the Federal Reserve, calling it "a natural place for that responsibility." He said the role should go to an agency with "strong accountability" as well as a measure of supervisory authority over financial institutions; the Fed already supervises bank holding companies.