More spending will give only a brief "sugar high" if G20 nations fail to clean up their banks, the World Bank said today as economic powers struggled to agree a response to the worst downturn in decades.
The comments went to the heart of a rift between Washington, which is pushing for governments to spend more, and European capitals, which want rapid moves to tougher market regulation in addition to massive public expenditure.
G20 finance ministers and central bankers were meeting in the south of England under pressure to resolve differences and pave the way for concrete advances when world leaders meet on the economic crisis in London on April 2nd.
Some progress is being made though. Switzerland, Austria and Luxembourg today offered to relax strict bank secrecy in some tax evasion cases.
G20 leaders are also expected to back a call to as much as double the money the International Monetary Fund has at its disposal to help emerging economies hit by a plunge in global demand for exports and a severing of credit lines.
However, Brazilian Finance Minister Guido Mantega, attending the talks in southern England, said the IMF would not get extra money from China, India, Russia or his own country until their voting power at the finance agency rose.
The G20 meetings are also tasked with delivering on pledges made in November to improve market regulation, tighten up on tax havens and also deal with the toxic assets - mostly mortgage debt-related derivatives - that sparked the credit crisis.
"If you don't take on the banking issue, the stimulus is just like a sugar high," World Bank chief Robert Zoellick, who was in Britain for the meetings, told reporters. "It pushes some energy into the system but then you get the letdown unless you reopen the credit markets," he said.
Japanese leaders sided with the US push for more spending but the unity of the group of developed and developing nations looked seriously compromised after Paris accused Washington of disregarding the urgent need for tough market regulation.
"The United States is insisting on the need for a strong, rapid and coordinated stimulus. Why? Because they were the last ones to put in place their plan and they are facing a bigger crisis," French Finance Minister Christine Lagarde said.