Finance news. My opinion.

European finance ministers agreed to push for tighter rules on bank bonuses as they prepared a common stance on overhauling the financial system before a summit of the Group of 20 nations.

Authorities need “stronger muscles and sharper teeth,” Swedish Finance Minister Anders Borg, whose nation currently holds the rotating European Union presidency, told a press conference today in Brussels after leading a meeting of EU finance chiefs. “The bonus culture must come to an end.” He said “there was a strong common European position” at the meeting.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said on Aug. 31 that they would press fellow G-20 leaders to regulate bank bonuses as well as require lenders to set aside more capital to avoid a repeat of the financial crisis that has caused global writedowns and losses of $1.6 trillion. G-20 finance ministers meet in London on Sept. 4-5 before a Sept. 24-25 summit of leaders in Pittsburgh.

French Finance Minister Christine Lagarde said she is optimistic that all 27 members of the EU will support proposals she brought to today’s meeting to curb bonus pay at banks. She said the options included a outright cap on bonuses, limiting them as a percentage of total pay, and taxing them.

“I think in the hours and days to come, all the ministers of finance will understand the suitability of the French position and will rally to it, and in a very formal way that may surprise you,” Lagarde said.

Today’s Meeting

U.K. Prime Minister Gordon Brown sees a cap on bonuses as difficult to enforce, the Financial Times reported yesterday, citing an interview. Chancellor of the Exchequer Alistair Darling did not attend today’s meeting.

“The British colleague endorsed the proposals in principle,” German Deputy Finance Minister Joerg Asmussen told reporters in Brussels. “Now we have to find a common G-20 position in London. It won’t be enough for Europe to take a position.”

The EU wants “a clear relationship between bonus and performance,” Asmussen said. Bonus payments will be more transparent and compensation may be deferred, he said.

“This will be a very difficult thing to get agreement on and implemented across a wide range of countries,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “Experience shows it needs to be sorted out on a country-by-country basis.”

Government Limits

Sarkozy said on Aug. 25 that France won’t hire banks that refuse to accept government limits on compensation, and executives from French institutions including BNP Paribas SA and Societe Generale SA promised to defer two-thirds of bonus payments for three years and to pay out one-third in shares.

“I don’t think the rest of the world will agree to those plans and efforts,” Otto Waser, chief investment officer at R&A Research & Asset Management AG said in a Bloomberg Television interview on Aug. 27. “Talents are just going to leave the industry and do their business elsewhere, so I don’t think it’s a workable avenue,” he said of the French proposals.

Amid concern over policy makers’ demands that banks also set aside more capital to prevent future crises, the cost of protecting bank bonds from default rose in Europe today by the most since May. The Dow Jones Stoxx 600 Banks Index was down 2.2 percent at 3:38 p.m. in London.

‘Up the Wall’

Merkel, who said the bonus system “quite rightly drives a lot of people up the wall,” joined forces with Sarkozy ahead of the last G-20 summit in London in April to demand steps to control executive pay, plus rules governing hedge funds and a new “architecture” for financial markets. Merkel, who faces elections on Sept. 27, has since voiced concern that governments may backslide on past G-20 commitments as the recession eases.

The euro-area economy barely contracted in the second quarter, with Germany and France returning to growth after the European Central Bank injected billions of euros into markets and governments offered consumers incentives to spend. World Bank President Robert Zoellick said today the chances of a “truly global recovery” have increased because of China’s expansion and signs that other economies are stabilizing.

As evidence mounts that the worst of Europe’s recession has passed, Dutch Finance Minister Wouter Bos said today that policy makers should start thinking about how to unwind government stimulus measures. Other ministers joined calls from the International Monetary Fund’s No. 2 official, John Lipsky, for the exit to be coordinated.

Exit Strategies

German Finance Minister Peer Steinbrueck, absent from today’s meeting in Brussels, told his counterparts in a letter last month that failure to align exit strategies risked “distortions of competition,” after governments extended more than $2 trillion in fiscal packages and help for banks such as Citigroup Inc. and Royal Bank of Scotland Group Plc.

“I think the exit strategy from this crisis should be coordinated at the European level and of course also at a global level. We will discuss this at the next G-20 in London,” EU Monetary Affairs Commissioner Joaquin Almunia said today.

Almunia and Borg said that while there were signs of improvement, the labor market would remain weak. Euro-region unemployment rose to 9.5 percent in July, a 10-year high.

“I cannot be optimistic for the next months,” Almunia said. “The figures are worrying.”

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the EU.

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