Divided G7 likely to resist Union

By Stewart Fleming

Date: 27/01/05

EU governments are to insist that a comprehensive approach is needed to resolving global economic imbalances when finance ministers of the Group of Seven (G7) industrial powers and Russia meet in London next week.

But the 4-5 February meeting is unlikely to lead to any significant policy initiatives, with G7 countries divided over policy.

As one former senior US official put it: "Neither the United States nor Europe are suffering enough economic pain yet to bring them to the negotiating table to try and work out a joint programme of action."

Representatives of developing countries, including China, will be joining the US, Japan, Germany, Britain, France, Italy and Canada at the meeting.

In Paris on 24 February French Finance Minister Hervé Gaymard urged the US to do more to help resolve global imbalances, saying that Washington needed to tackle its budget and current account deficits which were the source of the slide in the value of the dollar on foreign exchange markets.

"Europe," Gaymard said, "has until now taken on too much of the adjustment" - a reference to the slump in the dollar, which sent the €soaring to $1.36 in December. It is currently trading just below $1.30.

European policymakers are worried that Washington is not only doing nothing significantly to cut its budget deficit of 5% of gross domestic product, but that it is looking for a "quick fix" to the current account deficit. EU officials believe this could create even more instability.

Washington is keeping up pressure on China to change its policy on pegging the yuan to the dollar and so boosting its exports to the US with whom it has a large trade surplus. The US Treasury this week once more urged China "to have a more flexible exchange rate".

But officials in Europe are warning that revaluing the Chinese currency, coupled with moves by other Asian currencies pegged to the yuan, might do more harm than good. Were currency moves to disrupt the financial flows into the US, which are financing its current account deficit, then this could trigger the economic crisis policymakers are trying to avoid.

They emphasise the need to move cautiously, rather than putting pressure on particular countries to act.

Anticipation of a meeting of Finance Ministers of the Group of Seven (G7) industrial powers and Russia in London, 4-5 February 2005. Representatives of developing countries, including China, were also to be present at the meeting.