G20 Strains Cast Shadow Over Paris

Discord over the euro zone crisis, currencies and global economic governance threatens to overshadow the Group of 20 finance ministers meeting in Paris on Friday and Saturday, leaving officials little time to broker deals before the Cannes summit next month.

The finance ministers’ meeting is usually the opportunity for hard bargaining and deal making so that G20 leaders can iron out final differences, but Europe is seeking to put out the fires of its sovereign debt crisis while China and the US are again wrangling over currencies.

One ray of hope is a financing deal for the International Monetary Fund which emerging market countries are exploring and which could greatly increase the IMF’s firepower in dealing with the euro zone crisis. But Domenico Lombardi, a former IMF board member, says the emerging market plan will help only if Europe gets its act together and consolidates and enlarges its own bail-out fund, the European financial stability facility.

“The emerging market countries are hoping to put pressure on the Europeans by readying their own contribution and insisting that the euro area adopts sustainable economic policies”, Mr. Lombardi said.

The support of other nations for a special purpose vehicle or other means of channeling Brazilian and Chinese money through the IMF is unclear. People familiar with the discussions, for example, say that the US has appeared open to the plan, but Lael Brainard, US Treasury undersecretary, said on Wednesday that the IMF had “ample resources”.

The tensions and uncertainty present far from an ideal backdrop to the November G20 summit which president Nicolas Sarkozy had hoped would help his re-election campaign for the French presidency.

The euro zone will not resolve its problems at the pressure ministers’ meeting, G20 officials say. But France and Germany will come under growing scrutiny to ensure a definitive deal to end the crisis is ready for Cannes, with the US Treasury having taken a tactical decision to increase public rhetoric on the issue and the UK also increasingly insistent.

The US cannot play its hand too strongly, however, as Washington itself is vulnerable to sharp criticism, especially from China, for the bill passed this week in the Senate that would allow the US to impose tariffs on imports from countries with undervalued currencies.

China reacted furiously to the decision, saying it risked a global trade war and comparing it to the Smoot-Hawley tariff act of 1930 that kicked off a worldwide flurry of reciprocal protectionism and is widely credited with worsening the Great Depression.

The French finance ministry said the “absolute priority” in the run-up to the G20 in Cannes was to take measures to stabilize the euro zone which was “the epicenter” of the crisis. But it said the co-ordination of the whole G20 was needed to contain a slowdown in the global economy.

Much of the wider G20 agenda to encourage “strong, stable and balanced” global growth has fallen by the wayside this year as the euro zone crisis deepened. The French finance ministry said it would propose at this weekend’s meeting that developed and emerging countries with surpluses would put forward “two or three measures each” to help stimulate growth, although an official said these would not be ready for announcement in Paris.

Even if it were to be agreed, such measures would represent extremely slow progress as the move was expected last year and did not materialize.

France also hopes to make progress this weekend on a code of conduct for the management of large capital inflows and outflows which were destabilizing for emerging economies.