April 20, 2009 / 8:15 AM / 10 years ago

Rich G7 can't go it alone to calm economic storm

WASHINGTON (Reuters) - Finance ministers from rich nations, when they meet on Friday, will face less economic turbulence than at their last gathering two months ago, but they recognize they need developing nations to step up spending to revive the world economy.

U.S. Treasury Secretary Timothy Geithner speaks during his testimony to the House Financial Services Committee on Capitol Hill in Washington, March 26, 2009. REUTERS/Jonathan Ernst

Acknowledging the growing economic might of developed nations, U.S. Treasury Secretary Timothy Geithner scheduled a gathering of officials from the Group of 20 wealthy and emerging economies next Friday immediately on the heels of a meeting of the rich Group of Seven.

The unusual back-to-back meetings highlights the interdependent nature of economies around the globe and the rising power of emerging nations like China, India, Brazil and Russia, which the United States and other developed nations are urging to consume more and export less to foster recovery.

The framework for the finance chiefs’ meetings was largely set at their April 2 gathering in London, where G20 political leaders agreed to triple resources for lending by the International Monetary Fund, crack down on tax havens and tighten oversight on free-ranging hedge funds.

“That was a pretty ambitious agenda by itself and, this time around, I assume that they want to show they are results-oriented, which means a lot of detail-work is needed,” said Sung Won Sohn, an economics professor at California State University’s Channel Islands campus.

One theme the G20 political leaders struck in London was the necessity of looking past the current crisis — which will see the global economy shrink in 2009 for the first time since World War Two — to agree on how to thwart any recurrence. That is the sense in which Geithner and U.S. President Barack Obama have urged a new role on export-reliant countries like China.

When Geithner said this week that China was not manipulating its currency’s value — reversing his earlier position — and was in fact taking helpful steps stimulate its economy, he coupled it with a call for Beijing to use some of its stored-up wealth to boost global growth.

“Given China’s large and rapid increase in its current account surplus, these steps should be just a beginning to a series of policy steps to rebalance the Chinese economy, so that economic growth is more dependent on domestic demand, particularly private consumption,” Geithner said.

The Obama administration initially sought to push its G7 partners — Britain, Canada, France, Germany, Italy and Japan — toward agreement on more government spending to help their economies but hit opposition from Europe, notably Germany and France, which stressed a need to revamp financial regulation.

G7 sources say next week’s meetings aim to keep the momentum going from the April 2 summit, partly by trying to nail down commitments for tripling IMF funding to $750 billion (512.5 billion pounds) and for isolating tax-haven countries. That should be enough to prevent a flaring up of any differences over fiscal stimulus.

While the G7 participants are expected to issue their traditional closing communique, sources said none was expected from the following G20 session. Nonetheless, interest remains high in the G20 gathering because of the higher profile the extended group is taking on as a global forum.

“We’re in a global economic crisis so it’s going to take a global solution to get out of it,” Sohn said. “Countries from Saudi Arabia to Asia and Brazil are going to have to be part of the effort to keep this downturn from worsening.”

The IMF’s managing director, Dominique Strauss-Kahn, warned on Thursday that the global economy will be in “deeply negative territory” even if it appears that a freefall is gradually ending. Recovery is unlikely before 2010 and will require cooperation among major participants as never before.

“Of course, the solutions differ country by country, but there must be a coherent and coordinated response by the international community,” Strauss-Kahn said.

Reporting by Glenn Somerville, Editing by Chizu Nomiyama

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