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International financial crisis

International financial crisis

Published on November 26, 2008
Joint article by M. Nicolas Sarkozy, President of the Republic, and Mrs Angela Merkel, Chancellor of Germany, in the "Le Figaro" and "Frankfurter Allgemeine Zeitung" newspapers

Paris, Berlin, November 26, 2008
We can’t wait

Eleven days ago, we were in Washington with the other G-20 Heads of State and Governments to organize a joint response to the worst financial crisis for many decades. Following the burst of the subprime bubble, contagion has now reached all the developed and emerging world economies. This global crisis called for a global response. So the leaders of the world’s 20 principal economies decided on some common principles and an action plan. We have thus laid the foundations of a fundamental reform of the international financial system so that the excesses of the past never recur. We want more transparency, more accountability and stronger oversight of all the players. We have asked our finance ministers to implement this action plan before 31 March next year. We are expecting from them the full implementation of the principles and measures decided in Washington.

All the participants in the Washington summit agreed to "use fiscal measures to stimulate domestic demand to rapid effect". At the same time, they firmly committed themselves to guaranteeing the sustainability of their public finances. In doing so, we must not endanger economic and social stability in our countries.

We are experiencing truly exceptional circumstances. This international banking crisis is the worst to hit us for 70 years. Most European economies will record their worst performance for a very long time with one or several quarters of negative growth. Some of them will exceed the 3% deficit threshold, which is inevitable in such circumstances.
We believe that the world economy can recover in 2009, and then rebound. Euro area economies, in particular, remain fundamentally healthy. Household debt is generally low. Corporate balance sheets are sound. There is a strong trend towards lower prices, which should increase our citizens’ purchasing power and give monetary policy room for manoeuvre.

But this rebound can’t be taken for granted. In spite of the massive support given to the banking sector in all our countries, there is continuing disruption in the financial markets. Deep uncertainty prevails today. Consequently, investment projects are being revised or postponed. Consumption is low. Confidence has been dangerously eroded.

In this environment, it is of the utmost importance to forestall and prevent a spiralling recession in our countries. We call on banks and all financial institutions to make full use of the facilities given them to maintain and sustain credit flows to the economy.

In addition, the history of past banking crises tells us that quick, decisive public action is necessary to prevent irreversible damage to our economies. China has announced an impressive economic revitalization programme. The United States is preparing to do the same to follow up the ad hoc measures already taken in the first quarter of 2008.

Europe has shown its ability to act. The Washington summit was held at its initiative. In the Paris declaration of 12 October, we drew up a roadmap for stabilizing our financial systems and supporting them in the short term. In the same way as we had built a “European toolbox” for saving our banking system, we must now develop a common approach for revitalizing our economies.

Indeed, there is no one model for economic revitalization which can be implemented by 27 Member States with different economic and budgetary situations. On the other hand, we believe that a coordinated fiscal boost to our economies could restore consumer and investor confidence and avoid opportunistic behaviour within a group of countries which share much more than institutions. Everything must be done to support our economies during this exceptional period.

What could this joint approach be?

Any measures taken should meet three criteria: be significant, temporary and targeted. So they should do more than simply act as automatic stabilizers.

These measures could be in the field of investment and infrastructure financing, take the form of support for small and medium-size companies or provide direct support to poor households. It would be up to each European country to craft its own plan and decide on the appropriate mix, while prioritizing the measures which achieve maximum impact in the fastest possible time

- These measures should be consistent with the Lisbon Strategy because structural reforms remain more necessary than ever to our economies.

- These measures should also be consistent with our goal of long-term budget sustainability. This is why it is essential for our policies to remain within a common framework. We are going to work on this with our European partners over the next few days. Our citizens must know that we will not leave them to face alone the biggest macro economic shock of the past few decades. They must also be assured that we will never give up our fiscal responsibility or our goal of achieving stable public finances in the medium term.

- The European institutions should also do their bit in this revitalization.

First of all by providing the opportunity for consultations on the measures to be taken. One percentage point of European GDP is a good target, and national plans will have to get as close to it as their circumstances allow. We don’t need either formal approval or pernickety oversight, but guidelines which the European Council of 11 and 12 December could adopt. Some countries have already taken measures along these lines.

The European Union should then complement the measures decided in each country. The car industry and energy sector could for instance be supported by making new European Investment Bank funds available. The release of structural funds should also be speeded up by providing advance funding for some programmes, such as the one promoting energy savings. Greater flexibility, on a temporary basis, in the application of European rules on State aid and more ambitious infrastructure goals, for example in the field of high-speed Internet and transport and energy distribution networks, could also be sources of additional growth. Finally, the Growth and Stability Pact should be implemented flexibly. This would not demand any lengthy discussion since the Pact provides room for manoeuvre in the short term which must be used. The time for developing a genuine budget recovery plan will come later.

Finally, the EU can help ensure rapid implementation of the States’ plans because speed is crucial when it comes to economic revitalization. Member States must not be slowed down by the Community procedures when implementing their revitalization plans. Similarly, if additional Community spending is necessary, it must be authorized swiftly with due regard for the 2007-2013 Financial Perspective.

* * *

We pledge to do the utmost to speed up the recovery. We will do so keeping in mind the need to pursue the structural reforms and ensure the consolidation of public finances.

We urge the Member States to adopt these simple, strong principles at our next European Council as united Europe’s contribution to the Washington summit’s appeal for economic revitalization./.

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