World leaders head for US, recession grips Euro zone

World leaders headed to Washington on Friday to try to find ways to tackle a global economic crisis that has plunged much of Europe into its first recession since the euro currency was formed.
The worst financial crisis in 80 years has weakened the world's major economies and official data showed the 15-nation euro zone economy had shrunk by 0.2 percent for the second quarter in a row.
"We think that the situation is likely to get worse before it gets better," said Nick Kounis, an analyst at Fortis Bank.
"We will probably see further falls in output in the first few months of next year, before a gradual improvement later in the year, but we think that there will be no real recovery before 2010."
Analysts said they expected the European Central Bank to cut interest rates further to try to spur economic growth.
President George W Bush and other world leaders are gathering to explore options for relief and to work on ways to prevent similar credit and financial calamities from happening again.
It's a tall order, but Bush is hopeful that some common ground for action can be found at the extraordinary summit, which begins with a dinner Friday followed by closed-door deliberations on Saturday.
Ahead of the summit, Bush warned his counterparts on Thursday not to crush the global economy under a raft of strict new financial regulations. "We must recognize that government intervention is not a cure-all," Bush said. "Our aim should not be more government. It should be smarter government."
Bush put forward his own prescription, which includes bolstering accounting rules, reviewing anti-fraud provisions for trading in stocks and other securities, and improving regulatory coordination among countries. But he stopped short of the more far-reaching oversight and regulation that Europeans leaders want.
"We want to change the rules of the game in the financial world," said French President Nicolas Sarkozy said prior to the gathering.
The Europeans want to close loopholes that allow some financial institutions to evade regulation, and ensure supervision for all major financial players, including credit ratings agencies or funds carrying high amounts of debt.
"There is a need for urgency," said British Prime Minister Gordon Brown, who is seeking a new network of global regulators who would scrutinize the world's largest financial institutions.
Europeans also are advocating an early warning system that would watch for financial bubbles like the one that enveloped the U.S. housing market. The housing bubble eventually burst and created the mess the world leaders are now trying to clean up. They also want a pledge for concrete changes in just 100 days.
Critics blame lax oversight and failures by regulators in the United States and elsewhere to detect problems as one of the prime reasons behind the financial crisis.
The crisis, which erupted in the United States around August of last year as mortgage investments soured with the housing market's collapse, quickly spread to other countries. Banks and other financial companies suffered huge losses and foreclosures skyrocketed. Troubles then snowballed to other areas crimping, auto and student loans and locking up lending for many consumers and businesses worldwide.
All the fallout has pushed the global economy to the brink of recession. Unemployment in the United States bolted to 6.5 percent in October, a 14-year high.
Still, Bush put up a stout defense of capitalism.
"It is true that this crisis included failures, by lenders and borrowers, by financial firms, by governments and independent regulators," Bush said. "But the crisis was not a failure of the free market system. And the answer is not to try to reinvent that system."
Steven Schrage, a former Bush administration trade official and now an international business expert at the Center for Strategic and International Studies, said embarking on a massive regulatory revamp at this time when economic and financial conditions are so fragile would be like "in the middle of a five-alarm fire calling together the fire chiefs and trying to restructure the fire department."
With Europe, as well as parts of Asia and North America, suffering, leaders of the G20 developed and emerging countries travel to Washington to try to find ways to ensure the crisis, started by a U.S. housing market crash, is not repeated.
But agreement among the G20, which represents 85 percent of the world's economy and two-thirds of its population, is unlikely over whether more regulation of markets can protect consumers, savers and companies from the fall-out.
Washington says there should be no return to greater state control of financial markets. Much of Europe says without more regulation, a repeat of the last year's turmoil is inevitable.
British Prime Minister Gordon Brown called for more coordinated measures to spur economic growth, a policy area where there may be more consensus.
"By acting now we can stimulate growth in all our economies. The cost of inaction will be far greater than the cost of any action," he told reporters in New York late on Thursday.
European Commission President Jose Manual Barroso said he hoped to draw more emerging economies into global financial institutions such as the International Monetary Fund, saying Europeans were ready to lower their representation to make more room for countries such as China.
"There is an openness to accommodate an increased role of the emerging economies," the International Herald Tribune quoted Barroso as saying.
Some in the West say they hope that countries with large reserves, notably in the Gulf, will help fund the IMF, which has offered loans to economies laboring under heavy debts.