U.S. to Push for Global Stimulus

By BOB DAVIS

WASHINGTON -- The U.S. will press world leaders to boost emergency government spending to lift the global economy, risking a rift with European nations more concerned with revamping financial regulation.

In President Barack Obama's first foray into economic diplomacy, Washington will urge the shift at a summit next month in London, U.S. officials say, as markets look for a unified plan of action from the world's most economically powerful nations.

Washington's focus is at odds with France, Germany and other European nations that want the Group of 20 summit on April 2 to focus on rewriting rules governing financial markets. These nations say lax regulation was a major cause of the financial crisis and want to tighten their grip on hedge funds and private-equity firms.

All sides are looking to avoid a breakdown at the summit that would roil markets, which are already wary about whether government leaders know how to stem the economic decline, say U.S. officials and international economists. Expectations of the summit are high: A coordinated response is seen as critical so each government's efforts reinforce, rather than impede, the efforts of others.

The differences could be hashed out this coming weekend in London at a meeting of finance ministers from the G-20, and in Washington, in the steady stream of global leaders and finance ministers visiting Mr. Obama.

U.S. officials, who could receive support from China and other countries with big stimulus programs, contend additional government spending is needed to reduce the depth and length of the downturn.

Britain also may have an easier time seeing eye-to-eye with the U.S. than other European countries because both London and Washington are concerned that tighter financial regulation could harm their financial centers. Administration officials also say the G-20 isn't ready to put new regulations in place, so focusing in that area would be counterproductive.

The U.S., relying on a thinly staffed Treasury department, hasn't completed its plan to revise financial regulation, which ultimately needs congressional approval. Others in the G-20, which includes industrialized and developing nations, also need months to put new rules in place.

White House officials said that while there is "a slight difference of emphasis" within the regulatory debate, there is no rift on timing for a revamped regulatory framework.

A senior White House official said U.S. passage of a $797 billion fiscal stimulus measure showed the administration is "doing its part." He called coordinated action to address the current crisis the "first and most important" goal of the summit. "It's important that all countries take bold and ambitious efforts individually and collectively to restore growth," he said.

The shift in priorities urged by the U.S. is especially at odds with Germany, which has tried hard to balance its books in recent years. In January, Germany approved a €50 billion ($63.19 billion) stimulus. But Chancellor Angela Merkel has expressed skepticism about using heavy borrowing to solve a global crisis she says was caused by irresponsible behavior from private-sector players and governments alike.

Germany is keen to limit government borrowing in the European Union out of concern that countries with weaker finances are running up unsustainable debts, and the EU will be forced to bail them out. Ms. Merkel's spokesperson, Thomas Steg, said the chancellor believes regulation and market supervision "should play a very prominent role" at the summit. He said expanding Germany's fiscal stimulus package "is not in the plans."

The tension between the U.S. and European views was on display in a muted fashion even at the news conference last week in Washington with Mr. Obama and British Prime Minister Gordon Brown, who is hosting the April summit.

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Barack Obama

While Mr. Brown stressed the need for the G-20 to "set principles for the banking system for the future," President Obama focused on assuring that G-20 countries in "a coordinated fashion are stimulating their economies."

U.S. officials say they are making progress in convincing Europeans to make stimulus the top priority. They point to a statement by finance ministers of the Group of Seven leading nations in Rome last month that focused on coordinating fiscal measures.

The International Monetary Fund estimates that in 2009, fiscal stimulus packages and other increases in government spending will push combined economic growth in China, India and the G-7 nations -- the U.S., U.K., Canada, Italy, Germany, Japan and France -- more than two percentage points higher than it otherwise would be.

The IMF has been urging nations to increase fiscal stimulus by at least 2% of gross domestic product to boost growth. Of the G-20 nations, only the U.S., Spain, Saudi Arabia, China and Australia are expected to reach that goal in 2009, according to the IMF.

The World Bank Sunday said global GDP will decline this year for the first time since World War II, with world trade contracting at its sharpest rate since the Great Depression.

The first G-20 leaders' summit on the economic crisis, in November in Washington, had few concrete results in large part because the U.S. had a lame-duck president who couldn't make commitments for his successor.

Over the past month, the Obama international economic team in the White House and the Treasury has been working to figure out how to reassert U.S. economic leadership.

Most European nations had stimulus packages that were substantially smaller than the U.S. had. That's partly because they fear renewed inflation more than the U.S. did, but also because European nations often have richer unemployment and health benefits than the U.S. Those "automatic stabilizers" aren't counted in stimulus statistics.

The U.S. and Europe agree the G-20 should focus on another priority: fighting protectionism. But neither side has come up with an effective mechanism. U.S. and European officials are likely to ask the World Trade Organization to more closely monitor G-20 behavior and publish the results. Such "name and shame" efforts are notoriously weak because international institutions are loath to embarrass their members.

Even if the U.S. gets its way, the G-20 won't ignore financial regulation. The G-20 has approved the concept of regulating the world's largest financial institutions through international "colleges" of regulators.

Write to Bob Davis at bob.davis@wsj.com