British Prime Minister Gordon Brown last night (29 January) hosted French President Nicolas Sarkozy, German Chancellor Angela Merkel, Italian Premier Romano Prodi and European Commission President José Manuel Barroso in London for talks regarding the ongoing turbulence in international financial markets.
In a joint communiqué, the leaders told credit rating agencies to improve the information they provide to their customers and called for the "prompt and full disclosure" of losses by banks and other financial institutions in order to better predict global financial downturns.
They warned of regulatory action if no improvement is seen. "If market participants prove unable or unwilling to rapidly address these issues, we stand ready to consider regulatory alternatives," said the communiqué.
"If we do not want a return to protectionism, we have to show transparency," said Sarkozy, whose country faced a rude awakening last week as it emerged that its Société Générale bank had suffered a loss of €4.9 billion as a result of unauthorised trading.
But France is not the only country whose banks have been facing troubles lately. In the UK, the country's fifth largest mortgage lender Northern Rock had to be bailed out as clients started massively withdrawing their cash deposits, while Germany's state-owned bank WestLB has just revealed a net loss of around €1 billion owing to its exposure to defaulting US mortgages as well as fraudulent stock trades by some of its staff.
Meanwhile, US economic woes have led to growing concern that an American recession could spread to the rest of the world. The International Monetary Fund yesterday cut its growth forecast for the second time in less than six months, saying it now expects global GDP growth to reach 4.1% this year, down from 4.4%.
For the US, the forecast is now just 1.5% for 2008 and IMF Chief Economist Simon Johnson warned that the risk of contagion to other regions is real. "Reports of decoupling have been greatly exaggerated," he said, highlighting Europe's strong "trade and financial linkages" with the US.
While the US has chosen to react to the turbulence with an economic stimulus package, including the injection of hundreds of billions of dollars into the market and a steep lowering of interest rates by the Federal Reserve, EU leaders insisted the European economy is strong enough to withhold a crisis without such interventions.
"The fundamentals of the European economies remain strong with employment still rising. They are thus well placed to face the challenges presented by heightened global uncertainty," underlined the joint communiqué.
"We cannot be complacent. But we can be confident […] What is needed now is action that is both targeted and proportionate. We must not be tempted into protectionism, or futile attempts to stem financial globalisation, or an artificial stimulus of the economy," said Commission President Barroso.
Instead, the communiqué calls on the International Monetary Fund to put forward proposals on how to strengthen its international economic oversight and put in place a better "early warning system".
