Washington/Berlin: World leaders will probably agree next week to work together when the time comes to end their massive economic stimulus programs and they were also moving on Friday toward a stiffer line on bankers’ pay.
A week ahead of the 24-25 September summit of the leaders of Group of 20 nations to be held in the once-thriving US steel town of Pittsburgh, leaders including German Chancellor Angela Merkel were pressing for concrete results.
“Leaders will agree to coordinate on any talk of exit strategies going forward,” one source told Reuters. “They will agree to use the words ‘exit strategy´ more and more.”
Hundreds of billions of dollars have been pumped into the global economy in the past year and G-20 leaders are anxious to show they have a plan for withdrawing this stimulus only once a recovery is fully under way and before inflation is unleashed.
In Washington, US President Barack Obama’s top economic adviser said the way that pay for bankers is set must be recalibrated to ensure the same risky behavior that helped fuel the worst banking crisis since the depression of the 1930s is not swiftly repeated.
“Properly designed compensation practices constitute an important measure in ensuring safety and soundness in our system,” National Economic Council director Lawrence Summers told a Georgetown University conference.
European G-20 members have taken the lead in calling for some restraint on the “bonus culture” of banking, insisting it must be treated as a key item at Pittsburgh, and the issue seemed to be moving higher on the US’s agenda as well.
Federal Reserve sources said on Friday the US central bank was near to proposing wide-ranging rules to apply to any banker able to take risks that could imperil an institution.
That would be a step forward for US policymakers who have been reluctant to endorse anything like the caps or dollar limits on pay and bonuses sought by some European officials.
Germany’s Merkel said that, amid tentative signs of global recovery, G-20 leaders must step up more than they did when they met in April in London to show that they have the will to pursue meaningful financial market reform that will bring more stability.
“It is very important that we get concrete results that go well beyond what was agreed in London,” Merkel told a news conference in Berlin.
The G-20 agreed in April to “extend regulation and oversight to all systemically important financial institutions, instruments and markets”, and Merkel said a regime to give this pledge substance was vital now.
Others agreed that the Pittsburgh gathering needs to add substance to London’s promises to maintain G-20 credibility.
“The main message at the G-20 will be send a clear signal to show the economy is under control, reform is going on and happening, and money is finding its way through to the economy,” another G-20 source told Reuters on Friday.
The source used the analogy of am ailing patient to make the case that reforms can be useless if not applied long enough.
“It’s like when you are ill. You go to the doctor, he gives you a tablet and you feel ok and go back to work straight away, only to be even more ill a week later,” the source said. “The economy needs to keep taking its medicine.”
Reports continued to circulate in G-20 capitals that some bid might be made to come up with a proposals for a framework, or set of principles, that all could agree to as a road map for reducing global imbalances that have some countries racking up huge trade surpluses while others consumer their way into deficits.
In an interview with Reuters, Brazil’s central bank chief, Henrique Meirelles, suggested that much of the answer lay with the two countries on opposite sides of the current account imbalances - China and the United States - but it also required shifts in the balance of decision-making powers.
“Certainly only moves by the two sides can achieve rebalancing, that is by increasing US savings and increasing Chinese consumption,” Meirelles said.
Another element must be agreement for emerging-market countries, like Brazil and China, to gain a bigger say in global institutions like the International Monetary Fund.
British Prime Minister Gordon Brown, in a letter to European Union leaders, said the IMF could be an important tool in stabilizing the world economy.
“The IMF and the World Bank must have the tools they need to help countries manage and insure themselves against the risk of future crises,” Brown said.
“This could involve improvements to IMF facilities to make them attractive to a wider range of countries, the development and integration of regional reserve pooling arrangements, and the use by the multilateral development banks of innovative new facilities, to provide protection against sudden stops in global capital flows.”