"We would be making an error if we were content to look solely at financial markets," she said. She deplored huge debts that governments are accumulating to spend their way out of the present crisis. But she said she recognized, for the moment, that "there is no other possibility."

Sarkozy, Merkel, Blair Call for New Capitalism

The head of Europe's biggest economy said Thursday that world leaders should be looking at the massive U.S. deficit and other economic imbalances, not just problems caused by financial markets, as they debate a new global order.

Speaking at a conference in Paris on the future of capitalism, German Chancellor Angela Merkel singled out the American budget deficit and China's current account surplus -- the difference between exports and imports -- as problems upsetting the global economy.

"We would be making an error if we were content to look solely at financial markets," she said. She deplored huge debts that governments are accumulating to spend their way out of the present crisis. But she said she recognized, for the moment, that "there is no other possibility."

A Congressional Budget Office report estimates that the U.S. federal budget deficit will hit an unparalleled $1.2 trillion for the 2009 budget year -- and that is before President-elect Barack Obama's sweeping stimulus package is calculated.

European governments have agreed to be flexible about budget rules that limit deficits to 3 percent of gross domestic product as recession bites.

Merkel said the International Monetary Fund has not managed to regulate global capitalism, and she called for the creation of an economy body at the United Nations, similar to the Security Council, to judge government policy.

French President Nicolas Sarkozy, leading the two-day conference with former British Prime Minister Tony Blair, blamed financial speculators for encouraging a system fueled on debt.

He called financial capitalism based on speculation "an immoral system" that has "perverted the logic of capitalism."

"It's a system where wealth goes to the wealthy, where work is devalued, where production is devalued, where entrepreneurial spirit is devalued," he said. But no more: "In capitalism of the 21st century, there is room for the state," he said.

Governments around the world have had to step in to rescue credit-starved banks and financial institutions from collapse. They are also pumping billions of euros into their economies to encourage growth.

Measures will be taken by global leaders meeting in London on April 2, Sarkozy promised, urging the U.S. to join the international consensus. Blair called for a new financial order based on "values other than the maximum short-term profit."

"The greatest entrepreneur I had the chance to meet was passionate about what he had created, not what he had accumulated," he said.

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