International Finance Conference in Berlin

Merkel's Difficult Fight to Tame the Markets

By Anne Seith

AFP

Angela Merkel addresses the conference on financial regulation Thursday: The German chancellor wanted to send a signal to the markets.

Can the financial markets be tamed? If this week's international conference in Berlin, hosted by Chancellor Angela Merkel, is any indication, it will be difficult. Intended to show that the euro zone has its problems under control, the gathering merely highlighted just how precarious the current situation is.

Speaking at the international conference on financial market regulation in Berlin on Thursday, German Chancellor Angela Merkel tried to add a touch of humor to the proceedings. The complex processes in the financial markets are difficult to grasp, even for politicians, Merkel told the audience bluntly. But disinterested advisers are hard to find in the financial sector, she explained. "The position of honest adviser is still relatively vacant," Merkel quipped awkwardly.

Unfortunately, when it comes to the financial markets, there's not much to laugh about these days.

Indeed, Merkel's comment seemed more of a confession from a leader who must feel pretty helpless. For the past one-and-a-half years, since the bankruptcy of investment bank Lehman Brothers, the world has, at various G-20 summits, attempted to calm the financial markets and to prevent similar crises from occurring again. But successes have been few and far between.

Instead, banks are once again making huge profits, benefitting from the billions that central banks are pumping into markets at low interest rates. And in the past few weeks, full-scale panic came close to erupting again in the financial markets, this time due to the crisis in Greece. Once again, taxpayers had to provide huge sums of money to prevent a collapse, in the form of a €750 billion ($945 billion) rescue package for euro-zone countries in crisis.

Preparation for G-20 Summit

Germany's Finance Minister Wolfgang Schäuble called the two-day conference in Berlin to address these worries, and also in part to prepare for the G-20 summit in June in Toronto. Economists from around the world, representatives of various countries and the International Monetary Fund (IMF) all took part on Thursday. OECD Secretary-General Angel Gurria and Michel Barnier, the EU commissioner for the internal market and services, were there, while French Finance Minister Christine Lagarde sent a video message.

With the meeting, Merkel and Schäuble wanted to send a clear signal to the markets and spread optimism about the euro zone's ability to deal with the crisis. Instead, the event revealed the entirely desperate situation that the world finds itself in.

In her speech on Thursday morning, Merkel reaffirmed that the G-20, the 20 leading economic powers in the world, needs to take action soon. Otherwise, she said, "the people will despair of us." Merkel's agenda for the next G-20 summit includes pursuing a mechanism whereby the financial sector would contribute to picking up the tab resulting from the crises. Under consideration are a tax on banks and an additional tax to be levied either on financial institutions' profits or on all stock market transactions.

Less than an hour later, Tiff Macklem, the deputy governor of the Bank of Canada, explained politely that he had a lot of sympathy for countries like Germany that have supported their banks with billions and now want them to pay up in return. He pointed out that Canada had not, in fact, needed to bail out its banks. "We are doubtful that you can tax your banks to stability."

Merkel reacted angrily, saying that if countries only took their own interests into account, it would send the wrong signal. "We can't say, 'because we didn't have difficulties, I don't care about this or that problem,'" Merkel complained. But her appeal had little effect.

Familiar Debate

Shortly after Macklem's speech, the South Korean representative took the floor. He complained that the interests of emerging economies were receiving too little consideration. Afterwards, French Finance Minister Lagarde reflected on a possible reform of the IMF and World Bank and a better interaction between the two institutions.

The discussion was very similar to the debates that took place at the beginning of the financial crisis. It swung wildly from big-picture issues to the smallest details and back again.

Of course it is not the case that nothing will happen at all. Many observers hope that the international community can at least agree on higher capital requirements for banks. Even Canada signaled on Thursday that it was sympathetic to this issue. But despite the importance of a financial buffer for banks, it would not exactly be the kind of success that leaders can sell to voters in their own countries.

And it is precisely that kind of high-profile success that the G-20 wants to produce. That, at least, was the impression created at the last summit in Pittsburgh, where participants promised that in future, casino capitalists would no longer be able to play without any rules. Perhaps that was the mistake: Thomas Mayer, chief economist of Deutsche Bank, suggested that maybe expectations had been ratcheted up too high.

Nevertheless, things are certainly happening at the national level. On Wednesday, the first day of the Berlin conference, German Finance Minister Schäuble surprised his guests with a German ban on naked short selling and naked credit default swaps (CDS) on government bonds, which had been introduced at midnight on Tuesday. In the future, no one in Germany will be able to purchase CDS's if they are not actually intended for their true purpose as a kind of insurance on government bonds.

Plans for New Regulatory Authority

There are many who regard such unilateral action with suspicion. Jean-Claude Trichet, head of the European Central Bank, recently warned against "financial nationalism." But are such country-specific measures really contrary to the efforts of the G-20?

European Commissioner Michel Barnier, who is responsible for financial regulation within the EU, does not seem to share that view. Barnier does not want to wait for the rest of the world -- he is already working on plans for a new regulatory authority for insurance, banking and securities trading.

Barnier also wants to set up a fund to help prevent future crises and to regulate derivatives trading. "Eighty percent of derivatives are not subject to regulation," he explains. "The volume of this market amounts to $600 trillion."

Barnier also wants to put a stop to speculation using credit default swaps. He is planning draft legislation, which will be presented in October, which would mean that CDS transactions on national debt would be subject to compulsory registration, in the hope of creating more transparency. "These people don't like to come out in the light of day, so we are going to flood them and their products with light," he said.

Pulling in the Same Direction

The fact that different rules apply on different continents is not a problem, in Barnier's opinion. "I do not believe that a global regulatory structure can be improvised, given the technical, financial and political questions that would be involved. Such a thing can not be imposed from above," he told SPIEGEL ONLINE.

Barnier's goal is instead co-ordination. It is important, he said, "that all participants in the G-20 summit pull in the same direction and follow the same schedule." Such coordination has often been missing in the past.

Germany and the EU only want to pursue certain goals on the global level, because otherwise the competitiveness of their domestic financial industries could suffer. In principle, Barnier likes the idea of a tax on financial transactions, as has recently been debated in Germany and elsewhere, but only "under the condition that a tax is adopted internationally as a combined effort." He said he supports Europe pushing for such a tax.

At Thursday's conference, Merkel also stressed the importance of international coordination when it came to rolling back expensive government programs to fight the financial crisis, in order to avoid any unwanted side effects. "I'm very concerned about whether we will manage to reach an internationally coordinated exit strategy," the chancellor said.

One thing is clear: The conference in Berlin was only the prelude to a tough marathon negotiating session behind closed doors. "There is a lot to do," the IMF's Jose Vinals concluded. The international community was still "in the tunnel," he said.

http://www.spiegel.de/international/germany/0,1518,696095,00.html