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UNCLAS SECTION 01 OF 02 PARIS 000049 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL FR
SUBJECT:  SARKOZY, MERKEL: INTERNATIONAL FINANCIAL COORDINATION 
NEEDS FUNDAMENTAL CHANGE 
 
¶1.  (SBU) Summary:  At a January 8-9 "think-in" on capitalism, 
involving practitioner-politicians and philosopher-economists, 
President Sarkozy and German Chancellor Merkel said the G20 Summit 
on April 2nd must set up a new framework of global economic 
governance to avoid systemic risks in the future.   There was broad 
consensus that a new balance had to be struck between short-term 
gain and medium- to long-term investment and growth.  Furthermore, 
reform of the 60-year old institutions guiding the international 
financial system needed to go beyond the Reagan-Thatcher orthodoxy 
regarding the role of the state in the economy.  Ambassador joined a 
number of GOF Ministers for the opening sessions.  End Summary. 
 
Sarkozy and Merkel Call for Fundamental Change 
--------------------------------------------- - 
 
¶2.  (U) In a colloquium entitled "New World, New Capitalism" 
President Sarkozy, German Chancellor Merkel and former British Prime 
Minister Blair highlighted the need to put capitalism on a new 
footing and not just "fiddle with" it on the margins.  The French 
and German leaders stressed that this must include adoption of 
concrete changes at the G20 Summit in London on April 2, including a 
framework to avoid future crises and regulating activities that pose 
systemic risks.  Sarkozy highlighted national governments are the 
key actors today and need to coordinate their policies.  He warned 
that while he supported a strong relationship with the U.S., no 
country could impose its decisions unilaterally.  The global 
economy, he said, was no longer a single currency system.  Merkel 
called for consideration of a UN Economic Security Council with the 
power to deal with global economic problems comparable to the 
Security Council's mandate for threats to international peace and 
security.  She also promoted a Charter for the Global Economy with a 
status like that of the Universal Declaration of Human Rights. 
 
¶3. (U) The first panel discussion, chaired by Blair, looked at the 
role of values in bolstering capitalism.  Themes were 
trust/confidence, long-term sustainability and involving 
stakeholders (vice just shareholders) in private sector decision 
making.  Some participants suggested that laws should impose values, 
whereas Blair implied that, because of the limits of legal mandates 
and regulation, values should supplement government actions. 
Pragmatists such as Nobel Prize economist Amartya Sen asserted that 
the issue was not a refounding of capitalism but rather a 
realignment of the role of the state and the market, with the state 
taking responsibility for social welfare and public goods.  Others, 
including French economist Jean-Paul Fitoussi and Italian Finance 
Minister Tremonti, echoed President Sarkozy, insisted that 
governments need to oblige private - particularly, financial - 
actors to take into account democratically determined values like 
long-term growth or social justice.  On the issue of America's role 
and the international system, Francis Fukuyama predicted that 
America will take a more cooperative approach on the international 
scene.  Former French Prime Minister Rocard and Tremonti seconded 
this, and also stressed the need for a more coordinated European 
response to the crisis. 
 
¶4. (U) The second round table on "Globalization and Justice" was 
chaired by WTO Director General Pascal Lamy.  He stated the scope of 
the current economic crisis poses new challenges and requires a 
paradigm shift in how we manage the future of the global economy, 
rather than tinkering with government oversight or profit and equity 
issues.  In a discussion heavy on rhetorical flourishes critical of 
the U.S., EU Competition Policy Commissioner Neelie Kroes stressed 
that "there is no alternative to globalization" and the way forward 
is to "keep what works and change what doesn't."  Dutch Deputy PM 
and Finance Minister Weuter Bos cautioned that transferring 
responsibility from national governments to regional or 
international bodies would have a negative impact on social justice, 
as only governments can be held accountability for progress or 
failure.  Indian Trade Minister Kamal Nath lamented that what is 
lacking in globalization is distributive and social justice, 
highlighting the one billion Indians who earn less than two dollars 
a day.  Professor Joe Stiglitz echoed Nath, giving his critique of 
the lack of social justice in the U.S. market economy.  Lamy 
concluded by stating a return to the past, of tariffs and 
protectionism, is not a solution; there is a need to balance the 
objective of achieving minimal global standards ("an imperative") 
 
PARIS 00000049  002 OF 002 
 
 
with divergent national/regional models; and an overarching priority 
of securing a sustainable (by definition, less inequitable and more 
socially just) approach to international economic growth that 
engages fully all stakeholders in the global marketplace. 
 
¶5. (U)  The final panel discussion of "How can we regulate 
capitalism," was chaired by  Liberian President Ellen 
Johnson-Sirleaf who set a positive tone, calling for pragmatic and 
practical, rather than ideological, solutions to today's challenges. 
 "No one in Africa misses the age of five-year plans, state 
marketing boards, dual currency regimes and white elephant projects" 
 Both ECB Director Jean-Claude Trichet and former Financial Services 
Authority Chairman Howard Davies made the point that, financial 
institutions considered government regulation their biggest 
risk,prior to the current crisis.  It turned out, however, that 
their own risk management systems had serious shortcomings and they 
are now happy to accept government funds and guarantees.  While 
these experienced central bankers recommended regulatory changes 
that improve transparency and discourage procyclical or overly 
short-term behavior, French labor leader Francois Chereque wanted 
labor and environmental standards to be considered in financial 
decisions.  Nobel Laureate Edmund Phelps and Czech Central Bank 
Governor Zdenek Tuma called for careful evaluation of the cost of 
regulatory measures, lest suppressing "speculation" seriously dampen 
the dynamism of market capitalism.  Phelps questioned the idea of a 
new capitalism qualitatively different from the 19th century model, 
and was particularly dismissive of "shareholderism" as a variant on 
corporatism which supported neither growth nor democracy. 
 
¶6. (U) In a closing address, Prime Minister Francois Fillon warned 
that we had come within an inch of a global financial crash.  In the 
future no enterprise, institution or economic actor could be 
permitted to avoid supervision and regulation in a way that posed 
systemic risk.  Fillon highlighted the strength of Gaullism as an 
effective approach to safeguarding national, European and global 
equilibrium.  The Gaullist state, he said, has the ability to make 
long- term strategic decisions (sometimes without oversight or 
transparency as in the case of France's nuclearization program) and 
to find the balance between economic efficiency, capitalism and 
social justice.  Fillon also called for medium term engagements 
between energy producers and energy consumers to stabilize energy 
prices as well as measures to improve European energy security and 
address carbon emissions. 
 
¶7. (SBU) Comment:  This colloquium was put together by Eric Besson, 
State Secretary for Strategic Planning and one of the crossover 
Socialists recruited by Sarkozy.  The program was billed as a 
followup to a January 2007 think-in at the Sorbonne, also co-hosted 
with Blair.  For Sarkozy, this was an opportunity to close European 
ranks and especially shore up his German flank, on a reform of 
"financial capitalism" and to challenge to the United States to work 
constructively with Europe to move beyond "the status quo" of 
international finance.  As French press commentaries have noted, 
many here compare the fall of Lehman Brothers to the fall of the 
Berlin Wall, with both events highlighting the ultimate 
unsustainability of old approaches in a more and more "globalized" 
world.  If they still seek to goad the U.S. into leadership in ways 
that suit Europe, they are less than certain they can do the same 
with emerging economies. 
 
STAPLETON