Oil, Trade, Aid Give G8 Headache For London Talks

Oil, trade, aid give G8 headache for London talks

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Tue Jun 7, 2005 10:34 AM ET
By Brian Love, European Economics Correspondent

PARIS (Reuters) - Oil is too dear, China is flooding the world with cheap clothes, Europe is smarting from rejection of a draft EU constitution, the United States is living beyond its means and Japan's economy still looks stuck in the mud.

Tensions are all too evident over fair trade, Chinese currency controls and who does their bit for global prosperity, but the G8 club of leading industrialized nations, whose finance ministers meet Friday, looks short of consensual solutions.

On development too, where the rich countries signed up in 2000 to promises to halve disease and poverty, the United States, Canada, Japan, Germany, France, Italy and Britain are at odds over how to pay for the aid and debt relief required.

Indeed, aid for Africa, Britain's goal along with combating global warming during its presidency of the G7 club and the G8 group that includes Russia, is likely to dominate the talks in London Friday and Saturday.

But analysts see little room for progress after a string of previous meetings ended in stalemate, cranking up the pressure on British Prime Minister Tony Blair to broker a deal when he chairs an annual G8 summit in Scotland in early July.

OIL AND CURRENCY WORRY
"What the world faces are absolutely daunting but unique problems that require each country to work hard to resolve," Stephen Jen, a currency strategist at Morgan Stanley bank, said, referring to the economic problems of the G7 rather than aid.

"I don't see coordinated policies having a major role here."

As far as their economies are concerned, G7 ministers have repeatedly broached the risk to growth from world oil prices that have surged well above $50 a barrel, but to no avail.

That is one problem common to all G7 members, alongside the ones specific to each bloc such as deflation in Japan, slow growth in Europe and too much spending with not enough saving by U.S. government and households, building up big deficits.

Fast-expanding China's emergence as a major force in world trade is stealing the G7's attention and Washington is leading demands that Beijing stop keeping the yuan artificially low.

What started out as calls for a freer-floating yuan has, however, turned into a higher stakes showdown where China is saying it will not cave in to megaphone diplomacy -- all that against the backdrop of threats by the United States and the European Union to curb surging exports of Chinese textiles.

U.S. Treasury Secretary John Snow said ahead of the talks he expected China to move rapidly on currency regime change and U.S. central bank chief Alan Greenspan and ECB chief Jean-Claude Trichet did likewise this week in Beijing.

Chinese Finance Minister Jin Renqing is expected to join part of the London talks but analysts and financial markets are not holding their breath.

China, the world's seventh largest economy, has pegged the yuan, or renminbi, at close to 8.3 per dollar for a decade and others are clamoring for it to allow the yuan's value to be determined more by the free market -- on the assumption it will rise in value and so help other exporting nations to compete.

Currency matters have long been the main area of activity of the G7 group and there is at least one less headache this time as far as three of the four European G7 members are concerned because the euro's rise against the dollar has abated.

That eases the pressure on European exporters.

Europe's latest problem is the rejection by French and Dutch voters of a draft constitution designed to make life more manageable in a 25-nation European Union bloc, half of them sharing the single European currency.

The euro shed a bit more ground as the charter's rejection raised further doubts about the European project in financial markets, and sparked some anti-euro attacks by minority party members of recession-hit Italy's coalition government.

As economic growth languishes relative to U.S. rates or the runaway expansion of China and other rising stars, the European Central Bank is under pressure to cut interest rates to shore up lending and activity in the euro zone.

What ECB chief Jean-Claude Trichet said a month ago was "not an option" is now classified as "not excluded" by his chief economist, Otmar Issing.

Trichet told Reuters Tuesday that he was not preparing for a rate cut, but the debate signals that the ECB too is aware of the danger of another slowdown in growth that prompted the International Monetary Fund this week to suggest a cut may become necessary.

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