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G20 summit underway, main issues remain unsolved (Roundup)

By Nick Rigillo Nov 11, 2010, 11:52 GMT

A view of faces of G20 leaders in front of the Coex center in Seoul, South Korea, 11 November 2010. The G-20 Summit is running from 11 to 12 November in Seoul, South Korea. EPA/JEON HEON-KYUN

Seoul - Group of 20 (G20) leaders settled down for a working dinner in Seoul on Thursday in a bid to bridge fundamental differences on how best to revive their economies and tackle trade imbalances.

Amid a serving of king crab rillettes and chocolate brownies, heads of state and government representing 85 per cent of the world economy discussed ways to stop a currency war and were briefed on the fragile state of the global recovery by the head of the International Monetary Fund (IMF), Dominique Strauss-Kahn.

The meeting's host, South Korean President Lee Myung Bak, urged fellow leaders to work towards a 'meaningful outcome' for the G20, which has emerged as the main forum for discussing the global economy since the financial meltdown of 2008.

But the summit was accompanied by palpable tension, particularly between the United States and big exporting nations such as China and Germany.

While Chinese President Hu Jintao rejected accusations that China was manipulating the renminbi and insisted that it would 'never blame others for its own problems,' German Chancellor Angela Merkel rejected a US idea to limit the size of a country's trade deficit or surplus.

'Fixing limits for current account surpluses or deficits is neither economically justified nor politically appropriate,' Merkel said. 'This would also be in contrast to the principles of free trade in the world.'

The US has come under fire over last week's intervention by the Federal Reserve, which effectively devalued the dollar by printing money to buy bonds in its bid to revive the country's economy amid high levels of unemployment.

US President Barack Obama, who held bilateral meetings with both Merkel and Hu ahead of the summit, defended the Fed's actions, stressing that 'the most important thing that the United States can do for the world economy is to grow.

'Countries like Germany that export heavily benefit from our open markets and us buying their goods,' Obama said.

Most participants expected the G20 to reach some form of agreement, with European officials saying the rest of the world could draw inspiration from EU plans to use current account imbalances as 'a warning indicator' alongside other indicators of economic instability, such as wage evolution and real estate bubbles.

But the details of such a G20 early warning mechanism were expected to require months of further discussions.

'The summit is a credibility test,' said European Commission President Jose Manuel Barroso. 'The question is how far we can go at this summit to agree on joint action so we can boost global growth and jobs.'

Moreover, while fears of a new global recession might be receding, there were murmurings in Seoul about a possible new financial crisis affecting one of the euro area's weakest members - Ireland.

European Union officials were forced to reassure financial markets shortly after their arrival in Seoul over fresh concerns that Dublin would have to call for an EU bailout because of the country's record debt levels.

'We are monitoring the situation in Ireland on a permanent basis,' Barroso said. 'We have all the necessary instruments in place to act, if necessary.'

The G20's most likely successes were expected to concern financial reform.

Leaders were to reach a deal on so-called globally systemically important financial institutions - or banks that are 'too big to fail.' But special working groups tasked with identifying such banks were not expected to complete their work until the middle of next year.

'There is an agreement for a timetable and an approach' on this issue, said Chin Dong Soo, chairman of South Korea's Financial Services Commission.

During Thursday and Friday's talks, leaders were also expected to endorse a deal reached last month by G20 finance ministers to reform the IMF in a way that gives more decision-making weight to emerging powers, such as China and India.

The G20 was prefaced by a business summit attended by several leaders, including Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero.

In all, more than 30 heads of state and government were attending the summit. But French President Nicolas Sarkozy was only due to arrive in Seoul on Friday.