As world leaders converge on London, there are growing signs of a rift over how to respond to the economic crisis. European countries want more oversight and less public spending.
Sarkozy and Merkel are in lockstep
Germany and France have made a determined pitch for tighter regulation of financial markets, as global leaders gather in London this Wednesday to pull the world out of its economic downturn.
German Chancellor Angela Merkel said she was “worried” that G20 leaders would fail to tackle the root causes of the financial crisis, preferring instead to sweep core problems under the carpet.
“We need to redesign financial markets,” Merkel said at a joint press conference in London with French President Nicolas Sarkozy. “We need to agree to some very specific changes that will also be expressed in [the G20 summit’s final] communiqué.”
This is the G20's second meeting to address the economic crisis
Merkel warned that if leaders did not agree to sweeping changes now, then it would take years to muster the necessary political will to reform the financial system.
Specifically, Chancellor Merkel said she wanted to see regulations extended to hedge funds; credit ratings agencies held to more account; rules introduced for managerial pay packages; and lenders obliged to maintain holdings in the securities that they sell.
These are all areas where German proposals for reform have run into stiff opposition from the United States and Britain in the past.
However, with the world’s economy in turmoil because of the implosion of the US mortgage market, the patrons of the so-called Anglo-Saxon economic model are under pressure to give ground to Europe’s two biggest economies.
“Germany and France speak with one voice,” Sarkozy said. "Without new regulations, there will be no confidence. And without confidence there will be no recovery. It's a major aim, non-negotiable."
Sarkozy also named the elimination of tax havens as one of these lines in the sand, without repeating an earlier threat to walk out of the conference if French demands were not met.
Obama stresses consensus
Obama stressed G20 consensus ahead of the talks
The Franco-German demonstration of unity reinforces signs of a philosophical divide at the G20 summit.
While Germany does favor more regulation, it has been less enthusiastic about calls for extensive government spending to stimulate economies.
This is a key plank of Washington’s plan to get the global economy back on track, and Japan’s prime minister, Taro Aso, has also criticized Germany for failing to appreciate the need for extra spending, even if it means deeper government debt.
Despite this, US President Barack Obama, making his first overseas trip since his inauguration, was determined to play down the gulf between G20 leaders.
"The core notion that government has to take some steps to deal with a contracting global market place and that we should be promoting growth -- that's not in dispute," Obama said at a news conference with British Prime Minister Gordon Brown.
Obama added that all nations at the summit had engaged in spending initiatives to varying degrees, and that differences over how to respond to the crisis were “vastly overstated.”
Between them, the Group of 20 industrialized and developing economies have already committed to around two trillion dollars of spending.
The United States would like to see countries around the world commit to a coordinated effort to spend two percent of their Gross Domestic Product this year and next.
Outside, protesters clash with police
Police say the number of protests around the G20 is creating an "unprecedented challenge"
Meanwhile, riot police clashed with demonstrators on the streets of London, as some four thousand protesters gathered in the city’s financial district to express their frustration over the economic crisis.
Hundreds of protesters converged on a branch of the Royal Bank of Scotland, shattering three windows. The bank, which was rescued by the government in October, has become a lightning rod for public anger in Britain over the kind of banker excess which has been blamed for the crisis.
Police also staged baton charges to try to disperse several hundred protesters gathered around the Bank of England.