29 January 2008

FT: EU heavy hitters review market turmoil

French President Nicolas Sarkozy will use a “credit crunch” meeting in London on Tuesday to call for order to be imposed on a financial system that “sometimes seems out of control”.

In the face of stock market turmoil, the threat of a US recession, the scandal at Société Générale and the crisis at UK mortgage lender Northern Rock, the leaders of Europe’s four biggest economies want to show they have some grip on events.

Mr Brown, Mr Sarkozy, Angela Merkel, the German chancellor, Romano Prodi, Italy’s premier, and José Manuel Barroso, the European Commission president, will discuss a European position before next week’s meeting of the group of seven industrial powers in Tokyo.

The leaders are expected to call for greater transparency in financial markets, new arrangements for credit ratings agencies, better co-operation between national regulators and an enhanced role for the International Monetary Fund in assessing and warning of global systemic risks.

But the meeting also plays a valuable political purpose, allowing participants to argue that domestic economic difficulties are part of a wider global problem. They will almost certainly claim that those difficulties started in the US.

Speaking at a press conference in Brussels ahead of the London summit, Mr Barroso said it would be impossible for Europe to be completely immune if there was a recession in the US but he said the Commission wouldn’t recommend “for now an artificial stimulus package’’ like the $150bn US plan proposed by the Bush administration.

“Let’s be clear, it’s not time to run for the lifeboat,’’ Mr Barroso said “There’s a “positive current-account balance in Europe and the budget deficit is about 1 per cent of gross domestic product in the European Union”.

Mr Barroso also said that the European Commission may “slightly” lower its forecast for economic growth this year when it issues new projections next month.

Tuesday’s talks give Mr Brown a chance to present himself as fully engaged in European affairs, after the embarrassment of Lisbon last December when he upset colleagues by turning up three hours late to sign the new European Union treaty.

Mr Sarkozy is expected to give the talks a “moral” dimension after the events at SocGen last week.

The president, who campaigned on a promise of “moralising capitalism”, is expected to use the occasion to urge governments to “put order back in a system that sometimes seems out of control”, an official in Paris quoted Mr Sarkozy as saying.

The official said the leaders would reiterate their optimism about the underlying strength of the European economy but stood ready to come back with more concrete measures at a later stage if growth slowed dramatically later this year.

French officials also said that there was broad consensus on an agenda for tighter supervision, the need for which was underscored by the crisis at SocGen.

The leaders are expected to agree to allow ratings agencies to take their own steps to improve their processes and minimise potential conflicts of interests.

However, they will say they “stand ready to consider regulatory alternatives” if the ratings agencies fail to deliver.

© Financial Times