WASHINGTON (Reuters) - World leaders vowed to work together to overhaul the financial system as they headed to Washington on Friday for a summit on wresting the global economy from recession and avoiding future meltdowns.
With host President George W. Bush in his final two months in office and President-elect Barack Obama not participating, hopes for a conclusive summit were low. Nevertheless, European leaders pressed for commitments to prop up sagging economies.
“We need to agree on the importance of coordination of monetary and fiscal policy,” British Prime Minister Gordon Brown said en route to the meeting that begins with a White House dinner for political leaders Friday. Finance ministers will hold a separate dinner at the U.S. Treasury.
Obama sent representatives, including former U.S. Secretary of State Madeleine Albright, to meet leaders on the sidelines of the meeting but stayed away personally.
German Chancellor Angela Merkel, at a news conference in Berlin before heading to the U.S. capital, said there was pressure to relieve the crisis and ensure no repeat.
“The government will do everything to ensure there are more rules to prevent such a situation recurring,” she pledged.
Fresh U.S. and European data underlined the severity of the downturn policy-makers face.
The euro zone tumbled into recession in the third quarter and U.S. retail sales posted a record slump. Japan, the United States and Britain all are on the brink of recession, while China has slowed to destabilizing levels.
Federal Reserve Chairman Ben Bernanke, speaking in Frankfurt, said central bankers around the world stood ready to do more to ease credit strains.
The Washington summit, which concludes Saturday, brings together leaders from 19 nations and the European Union. It is officially a Group of 20 meeting, seating chiefs from key emerging markets like China, Brazil, India and South Africa with old-line industrial powers from the Group of Seven in what is likely the power constellation of the future.
But within the group many divisions remain.
Bush on Thursday pitched for modest reforms to preserve free markets, rather than stiffer financial regulation that some European nations favor to curb the excesses of capitalism.
In his weekly radio address, released on Friday, Bush said that “by working together, I’m confident that with time we can overcome this crisis.” But he noted it will not happen quickly.
Financial oversight bodies proposed no major revamp of the world regulatory order.
Rather, the International Monetary Fund and the Financial Stability Forum, a group of finance authorities from leading countries, agreed to a three-tier regulatory plan that would keep the IMF’s global oversight role, boost the FSF’s role in setting standards for supervision and keep national authorities in charge of implementing them.
But some emerging market countries seek more radical action. China is flush with foreign exchange reserves of nearly $2 trillion. Saudi Arabia also holds ample reserves and some want to tap part of those reserves to more fully fund institutions like the IMF, equipping them to rescue smaller economies hard hit by the financial crisis.
The meeting was billed as a chance for a shift in policy-making power to include emerging-market nations. But that may await negotiation, since it would require some rich countries to yield power, which is unlikely to come easily.
Japan’s Prime Minister Taro Aso on Thursday offered to lend up to $100 billion from his country’s $980 billion of foreign reserves to the IMF and pledged support for a dollar-based currency system in what seemed like a shot across the bow of French President Nicolas Sarkozy.
Sarkozy said he would use the summit, the first in a series, to make the point that the U.S. dollar, the linchpin of the global economic system since the Bretton Woods agreement of 1944, should not keep its dominance.
Sarkozy has been a dominant voice in seeking a restructuring of the global financial order, one in which all financial participants, including hedge funds, would face tougher regulatory scrutiny.
That is at odds with the U.S. position, outlined by Bush on Thursday, that free markets should not be restricted by excessive rules.
“The crisis was not a failure of the free market system,” Bush told a New York audience, adding that the greater threat to prosperity was “not too little government involvement, it is too much government involvement in the market.”
Britain’s Brown sought to cut through differences over ideology by calling for quick action on fiscal policy, effectively calling for a global effort to spend the way back to prosperity.
“There is a need for urgency. By acting now we can stimulate growth in all our economies,” Brown said in New York. “The cost of inaction will be far greater than the cost of any action.”
Reporting by Glenn Somerville, Editing by Dan Grebler