Stark divisions between Europe and the United States over how to reform the global financial architecture were highlighted yesterday by an attack by German Chancellor Gerhard Schroeder on speculators for wrecking economies.
Urging rapid reform of the financial system, he said worldwide development and co-operation was being derailed by speculative capital movements which had driven national and international exchanges and national economies to the brink of ruin.
He told a World Economic Forum meeting that 'many thousands of people' had been deprived of their livelihood and had their hopes 'thoroughly dashed'.
'If even George Soros - and he's a man who ought to know, having earned himself billions through such speculation - urges us to introduce regulatory factors to ensure justice, then it is high time for us to get down to some serious negotiating on an international financial architecture.' The comments contrast with the increasingly laissez faire policy adopted by the United States, which believes control of markets will result in even sharper financial volatility.
The US has used the annual World Economic Forum to set out its own views and has urged Europe to implement more structural reforms to create stability in global financial markets.
In particular, it believes Europe should implement policies aimed at boosting demand and increasing its share of imports, particularly from the crisis-hit Asian and Latin American countries.
Senior US officials, including Vice-President Al Gore, Treasury Secretary Robert Rubin and Deputy Treasury Secretary Lawrence Summers, have demanded that Europe trigger increased domestic demand to build up its share of imports.
The US has begun feeling increasingly sensitive towards its rapidly growing current account deficit.
It is estimated it will be as high as US$300 billion this year.
The size of the current account deficit is partially due to the high level of imports.
In particular, imports from Japan, which holds its largest bilateral current account surplus, have been seen as a key culprit.
The US wants Japan and Europe to play a more responsible role in increasing imports from the worst hit countries.
Mr Gore said he believed it was vital that Japan and Europe, which run sizeable surpluses, should increase the level of trade they conduct with other countries or, he warned, the world might not be able to prevent 'the financial crisis of 1998 from becoming the trade crisis of 1999. America cannot be the importer of only resort'.
In Asia in particular, Japan could play a critical role, as it was the largest single importer of Asian products and its continuing recession severely hampered Asia's own recovery.
'With due regard for the progress Japan has made, we - all the rest of us in the world - respectfully repeat to Japan, our friend and partner: Please, we need your help to deal with this global economic crisis.' Europe is also seen as a potentially important player in achieving global economic recovery, particularly as the launch of the euro has improved Europe's own growth prospects and the level of demand, which can be harnessed to boost imports.
Mr Rubin said: 'For a healthy global economy, it is very important for the other industrial countries in the world - Europe and Japan - to focus aggressively on promoting domestic demand-led growth and substantially reduce formal and informal barriers to trade.' However, Japan's main finance diplomat, Eisuke Sakakibara, defended Tokyo's recent measures to boost domestic demand-led growth and said the action Japan had taken so far was almost American in its aggressiveness.
World Economic Forum
Economy of Switzerland
Sitting next to him, Mr Summers quickly countered: 'I suspect that a review of Japanese pronouncements at the last eight meetings of the Davos economic forum would suggest that it was a good idea to wait and see what happens before declaring victory.'