Merkel vows to push G20 on ‘shadow banking sector’

German chancellor Angela Merkel has said she will push the G20 to make more progress on regulating financial markets and crack down on tax evasion, co-opting signature policy issues of her main challenger in September's elections.

Dr Merkel, who confronts leftist leader Peer Steinbrueck in a TV duel tomorrow, said she wanted to urge leaders of the G20 top world economies to agree a time frame for steps towards tighter regulation of the so-called "shadow banking" sector.

A key pillar of the campaign of Mr Steinbrueck, who is trailing Dr Merkel badly in opinion polls, has been to denounce what he calls the “dictatorship of financial markets”.

World leaders meet next week in Russia to negotiate the final piece of their financial crisis regulatory reforms, rules for this sector, an assortment of financial intermediaries such as hedge funds that handle $60 trillion of transactions a year - roughly the same size as the global economy.

“I want us to agree a binding time frame so it is clear when we reach which steps on this,” said Dr Merkel, leader of Germany’s conservatives, in a video podcast today. “Regulation is still faltering here”.

Mr Steinbrueck, who heads Germany’s centre-left Social Democrats (SPD), has long argued policymakers have not gone far enough in tightening regulation to prevent a repeat of the financial crisis. In 2010, he said “we do not yet have a legal framework to significantly curtail the shadow banking sector, if not dissolve it.”

Dr Merkel said in her podcast Germany would ensure that the G20 continues to tighten regulation of financial markets, recalling its goal "to regulate every financial market actor, every financial product, and every financial centre".

She added that she expected progress on the issue of tax evasion. “Here we will agree with the most powerful economies on an automatic exchange of information”.

Mr Steinbrueck led a crackdown on tax evasion when he was German finance minister in Dr Merkel’s 2005-2009 ‘grand coalition’ government of conservatives and SPD.

His party helped block an attempt by Dr Merkel's government last year to sign a bilateral deal with Switzerland that would have imposed taxes on assets stashed by German citizens. The SPD said the deal would have let off tax evaders too easily.

Opinion polls give Dr Merkel's conservative bloc, which includes her Christian Democratic Union (CDU) and the Bavarian Christian Social Union (CSU), a 15-19 point lead over Steinbrueck's SPD.

That virtually guarantees Dr Merkel will remain chancellor. But it is unclear whether she will get enough votes to continue her coalition with the business-friendly Free Democrats (FDP).

Should she fall short, Dr Merkel would probably be forced into difficult talks with the SPD. So despite a formidable lead, Merkel cannot relax: the prime-time debate tomorrow may be decisive for the shape of the next government.