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Trichet Sees Risk Big Nations Won’t Coordinate Economic Policy

By Mark Deen and Francine Lacqua

July 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said he’s concerned that a lack of coordination of economic policy around the world will allow the imbalances that led to the financial crisis to persist.

"There is a very big danger that major countries internalize their problems," Trichet said at an economic conference in Aix en Provence, France, today. "If we return to a picture of internal and external deficits that led to this crisis, we’ll have the recipe for a new crisis."

His warning precedes the July 8 meeting of leaders of the Group of Eight nations, who are gathering in Italy with their counterparts from India, China and Brazil to discuss responses to the first global recession since World War II.

There were signs last week that the recovery may be faltering. Unemployment among the 16 nations using the euro reached the highest in a decade in May and the region’s consumer prices recorded the first annual decline on record in June, official reports showed. In the U.S., employers cut more jobs than forecast last month, while the unemployment rate rose to the highest in almost 26 years. Home prices in 20 major U.S. metropolitan areas fell 18 percent in April, according to the S&P/Case-Shiller index.

International institutions need to monitor coordination of policy, and countries should watch their peers, Trichet said.

"I’m optimistic on many points that were thought very difficult, notably convergence of regulation and the elimination of pro-cyclical policies," Trichet said. On the question of coordination, "I’m more skeptical," he said.

‘Strong Message’

Trichet also said the ECB has sent a "strong message" to banks to spur lending to the "real" economy with its injection of 442 billion euros ($619 billion) of one-year financing into the banking system. Banks should accelerate the clean-up of their balance sheets, he said.

"We think it’s good they’re recapitalizing," he told journalists at the conference. "We still have a large pool that could be recapitalized. It would be appropriate to speed up this process."

The ECB estimates that commercial banks in the euro region may have another $283 billion of bad loans to write off by the end of next year. About $365 billion of writedowns have been reported.

In the U.S., bank losses and writedowns exceed $1.4 trillion.

The ECB left its benchmark lending rate unchanged at a record low 1 percent on July 2, when Trichet called that level "appropriate" as officials deploy new tools to fight the recession.

To contact the reporter on this story: Mark Deen in Aix en Provence, France at markdeen@bloomberg.net Francine Lacqua in Aix en Provence, France at flacqua@bloomberg.net

Last Updated: July 5, 2009 10:10 EDT