Sarkozy warns against rushed stimulus withdrawal

DAVOS, Switzerland (Reuters) - French President Nicolas Sarkozy warned central banks on Wednesday against withdrawing their monetary stimulus measures too abruptly, saying it could prompt a collapse of the world economy.

France's President Nicolas Sarkozy delivers a speech during the World Economic Forum (WEF) in Davos January 27, 2010. REUTERS/Philippe Wojazer

In a keynote address to the World Economic Forum of business leaders and policymakers, Sarkozy made an impassioned plea for global cooperation to regulate the financial system and attacked the excesses of capitalism that contributed to the most crippling crisis in decades, including excessive banker bonuses.

“We must manage prudently the adoption of measures to support (economic) activity and the withdrawal of liquidities injected during the crisis,” he told a packed auditorium in the Swiss ski resort of Davos.

“We must take care to prevent too abrupt a tightening that would result in a global collapse.”

Central banks have cut interest rates to record lows and flooded markets with liquidity to support their economies, but now face a challenge in withdrawing support before it lays the groundwork for future crises.

France is under pressure from the European Commission to cut its own hefty budget deficit, which swelled during the crisis.

The French leader, whose country emerged from recession in the second quarter of 2009, said tentative signs of economic recovery should make governments bolder, not more timid, in regulatory and structural reforms.

“Either we are capable of responding to the demand for protection, justice and fairness through cooperation, regulation and governance, or we will have isolation and protectionism,” he said in a 45 minute speech.

A forceful advocate of stronger regulation and state industrial policy, Sarkozy called for a refoundation and moralization of capitalism, and curbs on the bonus culture and “morally indefensible” pay packages.

He endorsed U.S. President Barack Obama’s proposals to stop commercial banks from engaging in speculative proprietary trading and from owning hedge funds and private equity funds.

But he said the G20 grouping of major economies was the right forum to reach a consensus on appropriate financial regulation, warning against unilateral action.

“How can we conceive that in a competitive world, we can insist that European banks have three times more capital to cover the risks of their market activities, without demanding the same of American and Asian banks?” Sarkozy said.

“Giving in to unilateralism, to ‘every man for himself’, would also be an economic, political and moral error.”

Sarkozy also said global imbalances needed to be corrected to prevent a repeat of the financial crisis, with surplus countries consuming more and deficit countries cutting back their spending.

Currencies were central to these imbalances and France would use its presidency of the Group of Eight industrialized nations and the wider G20 grouping of major economies next year to put reform of the international monetary system on the agenda, he said.

Reporting by Paul Taylor and Clara Ferrera Marques; Editing by Jon Boyle