Merkel begs G20 to speed up reform as markets fall

Financial markets had another nervous day yesterday as the German Chancellor, Angela Merkel, made an impassioned appeal to other world leaders to tighten controls over the banks, impose a global bank tax and assist her efforts to "save the euro".

In Frankfurt the Dax index fell by 2.9 per cent, while in Paris the Cac 40 index was down nearly 3.5 per cent. The euro traded 1 per cent down at around $1.23. The FTSE 100 traded 2.6 per cent lower at one point, while in New York the Dow Jones index opened 2.5 per cent down.

Despite her own unilateral move to ban "naked short selling" of eurozone government bonds in Germany, Chancellor Merkel said that she wanted G20 leaders to hurry the process of international agreement on financial reform by their summit in Canada on 26 June.

The German leader declared: "People are asking, 'What powers do you politicians still have?'. The Group of 20 nations agreed every product, every actor and every financial centre must in future be regulated. That's what we promised the people. Now, one and a half or two years later, people are asking what happened. At some point we have to deliver."

However it was the pound that was the centre of negative attention yesterday. Investors expressed worries about the new government, which were not assuaged by the publication of the formal coalition agreement. They pushed sterling down to near a 14-month low versus the dollar, and it tracked another slide in the euro. George Osborne's emergency Budget on 22 June is anxiously awaited.

European "contagion" remains a major concern. Ms Merkel's Finance Minister, Wolfgang Schauble, was even more outspoken in an interview yesterday: "I'm convinced the markets are really out of control. That is why we need really effective regulation, in the sense of creating a properly functioning market mechanism."

Mr Schauble meets his 15 eurozone counterparts in Brussels today and will present a "nine-point plan" to prevent future fiscal crises. The plan includes faster budget cuts, tougher penalties for eurozone countries that flout rules, and the option of an "orderly state insolvency", analogous to the "living wills" regulations for the big banks.

Chancellor Merkel's intervention, at a conference in Berlin about financial regulation, comes as German MPs vote today on their nation's share of the $1 trillion package of loan guarantees designed to "save" the euro. The German government has come under intense fire over the cost to the taxpayer of the Greek bailout and the prospectively much larger cost of shoring up the single currency. Ms Merkel's Christian Democrats recently suffered what she called a "bitter defeat" in Germany's most populous sate, North Rhine Westphalia. Nonetheless, observers believe that she will win the Bundestag vote.

The Chancellor made clear last week just how high the stakes may be: "The euro is in danger – if we do not avert this danger, then the consequences for Europe are incalculable, and then the consequences beyond Europe are incalculable." The German share of the commitment is estimated at $163bn.

Pressure for an international banking tax is growing. The coalition Government agreement states: "We will introduce a banking levy and seek a detailed agreement on implementation." Mr Schauble has said that if agreement cannot be gained at the G20 – and the US and East Asian governments – are unenthusiastic about the idea – then "we will work to see if we cannot have a tax at a European level".

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