DAVOS, Switzerland (Reuters) - Germany and Britain called on Friday for a global economic watchdog with strengthened powers to prevent rather than react to financial crises that can spiral into worldwide recession.
Cooperation amongst international financial institutions has failed to ward off the worst financial crisis in decades and a new charter should be forged, German Chancellor Angela Merkel told the World Economic Forum in this Swiss ski resort.
“This may even lead to a U.N. Economic Council, just as the Security Council was created after the Second World War,” she said.
While she spoke, business leaders and financial policymakers met behind closed doors at Davos to lay the groundwork for new regulatory structures and seek consensus on shaping a global response to the economic and financial shocks.
British Prime Minister Gordon Brown, who is spearheading global financial reform as chairman of the Group of 20 leading developed and emerging economies, said bold action was needed to get banks lending again and repair the financial damage.
“We are prepared to consider radical options. The old ways have not worked. We’ve got to rebuild the financial system,” he said.
The International Monetary Fund, set up by the Bretton Woods agreement in 1944, was outdated and focuses on cleaning up the mess when a country faces currency and debt crises. A different approach was needed, he said.
“What you’ve got to do is have a preventative facility which deals with crisis prevention rather than crisis resolution,” said Brown, who will host a G20 leaders summit in April.
Missing from the Davos debate over reshaping the international financial architecture for a globalize world, however, was the United States -- the world’s largest power.
No officials from the newly installed Obama administration attended.
Yet U.S. President Barack Obama’s rallying call for change was reflected in the words of political leaders at the four-day Davos gathering as they urged cooperation in solving problems.
”What we are seeing at the moment is thousands of people in every country of the world losing their jobs, thousands in fear of losing their homes, thousands of businesses going under.
“We can -- yes, your slogan -- yes we can do something about it. And we ought to be working together,” said UK’s Brown.
Mexican President Felipe Calderon said Obama’s election was
cause for optimism over global cooperation.
“Now there is strong leadership in the United States, and people around the world need leadership,” Calderon said.
U.S. Treasury Secretary Timothy Geithner has been making introductory telephone calls to fellow finance ministers.
In a discussion with UK Chancellor of the Exchequer Alistair Darling, the U.S. Treasury said: “They agreed that significant international action is necessary for global growth to regain its footing.”
The scope and cost of the crisis is huge -- $700 billion already spent to recapitalize banks and guarantees on banking borrowing and lending to the tune of a staggering $7 trillion. The fiscal stimulus from governments is the largest in history at some $1.5 trillion, Brown said.
The newly rich economies are suffering too. Global lending and investment to emerging markets has collapsed since 2007, shrinking by $800 billion as investors and foreign banks repatriate money and retreat from global finance, he said.
Testimony to the problem is Russia, whose currency fell to fresh record lows on Friday forcing the central bank to raise some interest rates despite economic stagnation.
Brown warned against a protectionist retreat into “financial mercantilism” which would leave the world poorer and ultimately lead to more traditional forms of trade barriers.
For all the political rhetoric on the need to avoid protectionism, there was little sign that trade ministers attending Davos were approaching a breakthrough in the long-stalled Doha Round of world trade talks. They were due to meet again Friday evening and into the weekend.
The United Nations Secretary General Ban Ki-Moon outlined multiple shocks absorbed by the world’s poorest over the past year -- soaring energy and food prices and now a credit freeze. He urged world leaders not to forget the world’s poorest, whom he called the “bottom billion.”
“We must stand by those who are most vulnerable,” Ban said, flagging the risk that the crisis deflects attention away from climate change, water shortages, poverty and underdevelopment.
Additional reporting by Keith Weir in London, Emma Thomasson, Jason Subler, Ben Hirschler, Nichola Groom, Barbara Lewis, Jonathon Lynn, Guy Faulconbridge, Natsuko Waki, Matthew Davies, Editing by Mike Peacock