Berlin plays down G20 spat with US

The German government on Tuesday played down reports of a serious clash with the US over the need for continued economic stimulus spending to revive growth, calling instead for a co-ordinated exit strategy from all members of the Group of 20 large global economies.

A senior government official said that President Barack Obama did not criticise Germany’s planned four-year budget savings programme, due to begin next year, in a 20-minute conversation with Angela Merkel, the German chancellor, on Monday.

“There was no demand for further stimulus measures [from Germany],” he said. Instead, they had discussed “structural measures for strengthening economic growth”.

“It is not true that the US has urged us to keep the stimulus going,” he added. “They recognise that Germany has made a great contribution to economic recovery.”

Another senior official closely involved in the G20 negotiations added that German budget stimulation was more expansive in the current year than in 2009, because the policy was “back-end loaded”, and the exit strategy would only begin in 2011.

In a briefing on the German government approach to the G20 summit in Toronto at the weekend, the officials said that the discussions on a framework for “strong, sustainable and balanced growth” was the most important item on the agenda, followed by progress on financial regulation.

Germany and France are leading a European push at the G20 summit for faster action on financial regulation, including measures to strengthen bank liquidity and capital ratios, and accelerate the implementation of “strong measures to improve transparency, regulation and supervision of OTC [over-the-counter] derivatives”.

Ms Merkel and President Nicolas Sarkozy of France have sent a joint letter to Stephen Harper, the Canadian prime minister who is chairing the summit, urging further efforts to agree on a levy or tax on financial institutions to ensure fair burden-sharing in the costs of any future crisis. They are also calling for more work to be done on an international agreement for a global financial market tax, or financial transactions tax, “as an additional element of the financial sector’s contribution”.

The letter spells out in some detail action on further regulation sought by Berlin and Paris, while recognising that new rules on capital and liquidity will need to be phased in “so as not to undermine economic recovery”.

“We should therefore aim to implement them by the end of 2012, with sufficient transition periods and appropriate grandfathering clauses,” they say.

They called on the G20 to “pursue vigorously our fight against tax havens, money laundering, corruption, financing of terrorism and non-compliance with agreed prudential standards”. For those who do not comply with agreed standards, they want “co-ordinated and appropriate sanctions” to be put into effect.

They are also suggesting that the Organisation for Economic Co-operation and Development should draw up a list of tax havens that are not complying with the standards, and for the Basel-based Financial Stability Board to publish by the end of the year “a list of jurisdictions that are non-co-operative with regard to internationally agreed prudential standards”.

In addition to the action on banks and derivatives trading, Germany and France want action to reduce the influence of credit rating agencies.

“The lack of competition in the rating market should be assessed, and we should ask the International Organisation of Securities Commissions to propose measures to address this issue,” the letter says. They also want new rules in the rating agencies international code of conduct to address the impact of the agencies in “amplifying financial turbulence and financial stability”.