SECRETARY PAULSON'S LUNCH WITH CHANCELLOR BROWN

C O N F I D E N T I A L LONDON 008207 SIPDIS NOFORN SIPDIS E.O. 12958: DECL: 11/28/2016 TAGS: EFIN ETRD EAID SENV UK SUBJECT: SECRETARY PAULSON'S LUNCH WITH CHANCELLOR BROWN Classified By: Ambassador Robert Tuttle for reasons 1.5 (b) and (d) ¶1. (C/NF) Summary: Chancellor Gordon Brown hosted visiting Secretary of the Treasury Henry Paulson for lunch November 28 SIPDIS at Number 11 Downing Street. They discussed climate change, advance market commitments to provide vaccines in developing countries, the future of the Doha Round, and the need to be ready for any future financial shock. ¶2. (SBU/NF) The Chancellor was joined at the lunch by Governor of the Bank of England Mervyn King, Financial Services Authority Chairman Callum McCarthy, Chief Secretary to the Treasury Stephen Timms, Economic Secretary to the Treasury Ed Balls, HM Treasury Managing Director for International and Finance Jon Cunliffe, and Economic Adviser to the Chancellor Shriti Vadera. Secretary Paulson was joined by Ambassador Robert Tuttle, Undersecretary of the Treasury Timothy Adams, and Senior Adviser Michele Davis. End summary. Financial Stability ¶3. (C/NF) Secretary Paulson commented that the world economy is as strong as it has ever been, adding that there had not been a global financial shock in a long time. But he noted that finance ministries must be ready to act in the event of a shock. Bank of England Governor Mervyn King agreed, noting his fear that markets had become accustomed to low interest and inflation rates, and expressing his concern that any sharp increase in interest rates could exacerbate an eventual crisis. The participants also discussed the likely German G8 proposal on hedge funds. All agreed on the need to monitor the growth and activities of hedge funds. Both the U.S. and the UK said that they had conducted simulation exercises on how they would handle a financial crisis. Secretary Paulson and Chancellor Brown agreed that the U.S. and the UK should conduct a joint tabletop crisis exercise. Climate Change ¶4. (C/NF) Chancellor Brown, citing the recent Stern report, underlined the importance of taking action against climate change. He noted that he had recently spoken to World Bank President Paul Wolfowitz to urge the World Bank to encourage developing countries to invest in alternative energy sources. The Chancellor also congratulated Secretary Paulson on his open approach to the issue of climate change. Secretary Paulson offered little hope that the U.S. would change its position on carbon trading at the federal level, but noted that the U.S. may propose some new initiatives on climate change under the theme of "energy security." Advance Market Commitments ¶5. (C/NF) Chancellor Brown encouraged Secretary Paulson to participate in the UK-led initiative involving advance market commitments (AMC) to encourage pharmaceutical companies to build capacity now to produce pneumonia vaccines for use in the developing world. Secretary Paulson noted that it was an excellent idea, but said that the U.S. does not have the funds to participate in the program. Chancellor Brown responded that even a symbolic participation by the U.S. would be very helpful. Doha Round ¶6. (C/NF) Secretary Paulson stressed that market access is the key to resolving the deadlock in the Doha Round. He noted that conventional wisdom surrounding the impossibility of concluding the round might be overstated, saying that with Doha, a new farm bill, and the expiration of trade promotion authority all coming simultaneously, "you never know what can happen." Chancellor Brown complained about the high level of EU agricultural subsidies. He said that by 2012, ten percent of the EU's budget will go to France in the form of subsidies. He also said that, as Poland fully integrates in the EU's common agricultural policy, it would be a huge beneficiary of EU subsidies. ¶7. (U) This cable has been cleared by U.S. Treasury. Visit London's Classified Website: http://www.state.sgov.gov/p/eur/london/index. cfm Tuttle