Reform and cooperation essential for recovery, says Geithner

US Treasury Secretary Timothy Geithner said the current international financial system needs to be reformed to face the challenges of the 21st Century, and global cooperation, he added, is essential.

"After the experiences of the Great Depression and World War II, the United States led in the creation of the international financial system that anchored prosperity and stability for more than 60 years," Geithner said in testimony on the role of the Group of 20 (G-20) in the global economy, prepared for the Senate Foreign Relations Committee.

"Today, that system must be reformed to address 21st century challenges," he said. "The United States again faces an opportunity to help shape a system that ensures better economic potential for future generations in America and around the world."

Speaking on the state of the economy he was optimistic: “We are now moving from a period of rescue and repair to one of recovery.”

He added: “Cooperation through the G-20 will remain essential as we start to unwind extraordinary measures and put in place the broad framework to achieve a strong, sustainable, and balanced recovery, and implement profound financial reforms at home and abroad.”

Geithner also urged the world to rebalance the economy to achieve strong and sustainable growth. “Moving from a global economy based on US demand to one based on global demand is critical to our domestic efforts to reduce unemployment and increase the wages of middle-class Americans.”

In the future emerging markets, he added, need to shift their growth towards domestic demand and reduce their reliance on exports.

G-20 countries have pledged to keep markets open, not to erect protectionist barriers, and not to retreat into financial protectionism said Geithner.

And governments worldwide are committed to keeping the fiscal stimulus packages flowing, he said. “We cannot make the mistake of putting on the brakes too early or withdrawing support prematurely.”

Finance ministers have also agreed to put in place stronger constraints on risk taking across the financial system, to bring appropriate oversight to key institutions, products and markets, and to provide the tools necessary to wind down firms that fail, noted Geithner.

A coordinated international regulatory effort is needed, to avoid lax oversight, regulatory arbitrage and a race to the bottom, he said.

The financial crisis clearly demonstrated the central role that the International Monetary Fund (IMF) plays in the global system as a crisis responder, added Geithner.

In a reference to the growing importance of emerging markets, such as China, he stressed that the IMF's governance structure needs to evolve to “reflect the relative weights and changing dynamics of the world economy”. But he also stressed that the US needed to preserve its strong leadership role in the Fund.