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Frankfurt. The Group of 20 rich and developing nations must tackle global economic imbalances in its new role as the key international policy forum, European Central Bank President Jean-Claude Trichet said on Sunday.

Trichet said the G-20’s new role, backed up by the IMF and the Financial Stability Board, allowed a combination of expert analysis and peer pressure.

“It is particularly important that the G-20 is designed to be the premier forum for international economic cooperation.”

“The G-20 has to address the issues of the domestic large imbalances between savings and investments, and of the set of unsustainable external imbalances.

“We know these imbalances have been at the roots of the present difficulties. If we don’t correct them, we’ll have the recipe for the next major crisis. This of course is totally unacceptable.”

Trichet said central bankers appreciated G-20 leaders’ commitment to fiscal responsibility and their comments in Friday’s Pittsburgh communique that a sense of normalcy should not lead to complacency.

Failing to wind back public stimulus programs at the right time would damage confidence and delay recovery, he said.

“One thing is sure. When time comes, systemic economies are not credible in going back to sustainable fiscal policy in the mid to long run,” he said.

“We won’t have the recovery which we are hoping for.

Because governments would not inspire confidence to households and corporate business. It is the evaporation of confidence that created this dramatic turmoil. Now we have to do everything to rebuild confidence.”

Trichet said US policy makers’ commitment to a strong dollar was important in keeping currency markets and the global economy stable. The euro hit a one-year high against the dollar on Wednesday.

The ECB chief said recent improvements in financial markets were not surprising, given the actions taken by central banks and governments, and policy makers were keen to see how this fed into the real economy.

“We monitor with great attention at this stage the interaction between the financial sphere and the real economy,” he said.

Trichet urged banks to boost capital bases and said the Basel committee’s proposed new rules struck a good balance between a long-term view of capital needs and avoiding measures which would stop banks lending.

“With the improvement observed in the financial markets some institutions and market participants might think there is no need for the reforms designed at global level. It would be plain wrong to think that,” he said.

“More than ever it is extremely important to introduce the necessary reforms in the financial system, in order to strengthen its resilience and avoid excessive booms and busts.”

Banks, bonuses, tax havens and under-regulation caused the financial crisis and are the keys to reform. Not so, the Organization for Economic Cooperation and Development warns as the G-20 takes steps in such areas.

Meanwhile, an OECD report out on Sunday warned that G-20 pledges for action on banks, bonuses, tax havens and under-regulation could even end up doing more harm than good.

It said progress on strengthening capital bases of finance companies and related regulations was in the right direction.

“A widely held myth is that the crisis occurred in a regulatory vacuum. Deregulation had been a factor but the crisis broke “within an overall framework of complex rules” and supervision.



Reuters