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Munk School of Global Affairs

The German and European contribution to global financial stability and growth

By Angela Merkel, chancellor, Germany

Financial sector reform must be implemented fully and internationally. This also constitutes one of the objectives at the summit in Seoul

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The global economy is once again on the path to growth, gradually recovering from the crisis that erupted in the financial markets. In July, the International Monetary Fund revised its global growth forecast for 2010 upward to a present value of 4.6 per cent. This positive development would hardly have been conceivable had the G20 not reacted to the crisis appropriately.

Of course, the top concern on the agenda was, and continues to be, the reform of the international financial system. The G20 leaders are committed to do everything in their power to prevent such a crisis from happening again. Financial sector reform must be implemented fully and internationally. This also constitutes one of the objectives at the summit in Seoul.

An important step on the way to a financial system that is better able to withstand a crisis is to increase equity standards for banks. An important breakthrough has been reached with the latest proposals submitted by the Basel Committee on Banking Supervision. The requirements for equity — both in terms of quantity and quality — and liquidity standards should be tightened. Germany expressly supports these proposals. To increase the stability of the financial architecture, the new equity regulations must be implemented in all countries of the G20.

In accordance with the G20’s goal to create the framework for the restructuring of international financial institutions and to provide incentives to reduce systemic risks, Germany proposed draft legislation in August. The establishment of a restructuring fund is being planned to finance the restructuring or controlled settlement of financial institutions with minimal impact on the financial markets. The fund is supplied by bank fees whose amount will be aligned with the bank’s systemic risk.

At the level of the European Union, the European Commission is working on a harmonised legal framework for national restructuring systems. It will soon present proposals for legislation. There has been substantial progress on improving control in Europe. European controls, which will be established as of 1 January 2011, will improve the quality and coherence of controls in the European Union and will make an important contribution to ensure the stability of the financial markets.

With all these provisions — facilities for restructuring or settlement in case of a crisis, regulations for derivative markets, strengthening of control and avoidance of distortion of competition — the goal that every financial market, every participant in the financial market and every financial instrument is subject to appropriate regulation and control is even closer than before to being met.

The shared commitment to a sustainable, balanced and strong path to growth is one of the important elements of our international cooperation in the G20. With its measures to strengthen the economy — in the total of more than €100 billion — Germany has played a considerable role in halting the downturn. Business enterprises made extensive use of reducing work hours and retaining their permanent staff while employees proved to be especially flexible and accepted temporary reductions in remuneration. The result speaks for itself: the number of unemployed workers today is lower than before the crisis erupted.

The fact that Germany has navigated the crisis better than many other countries is further evidence of the success of its economic and social model of a social market economy, which has been proving itself for decades — a system that is supported by extensive social consensus and good cooperation among government, business and employees. In an international comparison, Germany as an economic location can win points with the exemplary competitive capabilities of its enterprises as well as its stable domestic demand. Today, Germany is once again Europe’s growth locomotive.

In most countries, the economic stimulus plans that had to be implemented during the crisis continue to play a supporting role in 2010. However, with increasing economic improvements, it is time to tackle the consolidation of public budgets in order to meet the goals set out at the G20 Toronto Summit. I am convinced that the stability of public finances is an indispensable condition for sustainable growth.

To safeguard the consolidation course, Germany has included a new debt-limiting regulation in its constitution. This new regulation stipulates the reduction of the budget deficit to nearly zero by 2016. The German government is implementing this target through financial planning. It thus complies with the growth-friendly consolidation as agreed to by the G20. This way we establish confidence in borrowers, investors and the financial markets. Germany carries a special responsibility within Europe as an anchor of stability.

With its Europe Strategy 2020, the European Union is pursuing an ambitious programme for more growth and employment. At the centre of this strategy are improvements in research, development and education. Germany not only excluded these sectors from its cost-saving efforts but has also been investing in them more than ever in the current period. It is also expecting growth impulses from our energy concept, which is designed for the long term and spans a bridge into the age of renewable energy sources — providing a more reliable, more economical and cleaner supply of energy.

The worldwide financial crisis has proven once again — even if it occurred in a particularly drastic way — that the markets require a state-run structural framework to prevent them from getting out of control. Given the ever-increasing international interdependence of our economies, this applies no longer solely on a domestic level but increasingly on an international level as well. This must be reflected in the reality of our economic policies. It means that we need suitable and preferably worldwide applicable regulations.

However, the G20 would not fulfill its responsibilities as the most important forum for international coordination of economic and financial policies if it were to limit itself to the questions of financial market reform. The crisis has demonstrated to us, very clearly, the high degree of importance of the concept of sustainability in our economic approach. We also should not wait until foreseeable undesirable developments once again culminate in a crisis. Therefore, the G20’s future agenda must accommodate other global challenges as well. Open trade routes and completion of the Doha round of trade negotiations, a secure and sustainable supply of raw materials, and a responsible development policy are a few examples. I very much appreciate the extensive efforts made by the Korean presidency of the G20, especially as it relates to the Development Working Group. I interpret this as a sign that the G20 is on the right track.

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