G7 Says Recovery Taking Hold, Oil a Risk

YAHOO ^ | 4/20/02 | Glenn Somerville

[Tumbleweed_Connection]

Finance chiefs from the world's wealthy nations on Saturday agreed that a global economic recovery is taking hold as they unveiled a plan for heading off debt crises like the one crippling Argentina.

In a closing statement stressing determination to clamp down on groups that fund attacks such as those that leveled the World Trade Center and damaged the Pentagon (news - web sites), Group of Seven finance chiefs vowed to do whatever is necessary to sustain a pickup in activity in the face of risks like costlier energy.

But the unity they strove to present was marred over the course of the meeting by public displeasure from European officials over hefty U.S. steel duties. Europe has put the wheels in motion for retaliation against some U.S. goods.

"Economic recovery from the slowdown is under way, supported by appropriate and proactive macroeconomic policies that were in part a response to the tragic events of Sept. 11, but downside risks remain, including those arising from oil markets," the one-page communique said.

World oil prices have surged in recent months, largely because of the turmoil in the Middle East. A continuing rise could send costs and prices higher in the industrial economies of the G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan.

European officials still were simmering after the meeting about trade issues, specifically U.S. steel import tariffs.

Spain's Rodrigo Rato, current chairman of the Euro Group of finance ministers, said Europe pressed its point that America's steel duties could hurt recovery hopes. "Conflicts between countries, not least between the U.S. and EU, are important not just to us but to the world economy," he said.

MEET UNDER HEAVY GUARD

The three-hour meeting took place in a heavily guarded U.S. Treasury Department (news - web sites) behind steel barricades manned by hundreds of police. As officials mulled the economic future, tens of thousands of protesters marched peacefully through nearby streets, raising their voices against everything from globalization to Israeli military actions in the West Bank.

But attention inside the meeting focused on other kinds of crises. The G7 ministers said that, in future, agreements by emerging market countries to borrow money should include debt restructuring provisions that will clarify what happens if payment problems arise.

This represented at least a partial victory for U.S. officials who have been pushing for a "market-based approach" to handle economic difficulties more smoothly in future than has been the case with Argentina, which continues in social chaos as it desperately seeks new loans.

After the G7 finance ministers' meeting wrapped up, the IMF (news - web sites) held its semi-annual gathering nearby, where the new G7 action plan was likely more fully discussed. Argentina also was expected to press its case for renewed loans from the IMF.

U.S. Treasury Secretary Paul O'Neill, host of the G7 ministers' meeting, said that Argentina "is still a key concern" and urged authorities to work with the IMF to craft a comprehensive and workable reform plan.

At a media briefing, he said the G7 wanted to "move from reacting to crises with repair efforts to a world in which all nations have investment-grade sovereign debt." Investment-grade ratings make countries more attractive to investors.

CURRENCY NOT ON THE TABLE

The U.S. Treasury chief said there was no talk of currency values at the G7 session, and drew laughs when he said European participants did not raise the issue of America's big current-account gap, which some say is a potential danger if other nations begin investing less in the United States.

But France's finance minister Laurent Fabius said later the big U.S. deficit on current account -- the broadest measure of trade since it includes not only goods but also flows of capital -- was indeed a concern.

"There are clearly positive signs of an economic recovery in the United States, but the imbalances in its current account are worrying, and they should be addressed soon," Fabius said.

Any change in U.S. prospects that made its markets less attractive to foreigners seeking good investment returns could lead to swift and unsettling swings in the relative value of currencies that would be upsetting to the whole G7 group.

In response to questions, O'Neill said there had not been an extensive discussion about risks that protectionist trade measures could derail a recovery. But European representatives begged to differ, making no secret of their feeling of betrayal that a U.S. that preaches free trade did not practice it.

"Its getting serious now," Austria's finance minister, Karl-Heinz Grasser, said on Saturday as he warned retaliation was coming. German Finance Minister Hans Eichel was equally blunt after the G7 session and more chilling in his assessment of potential consequences.

"It would become a very severe burden for the world economic recovery if it came to what we all don't want to happen -- a trade war between the U.S. and Europe," Eichel told reporters.

With the recovery bandwagon rolling out, laggard Japan clamored for a seat.

In its World Economic Outlook that assesses worldwide prospects, the IMF has said that global growth should pick up to about 2.8 percent in 2002 from 2.5 percent last year. It saw the U.S. and European economies expanding but predicted Japan's economy will shrink this year.

Japanese Finance Minister Masajuro Shiokawa told reporters after the meeting that Japan wanted to boost growth and would have another economic revival plan to announce by June.

But O'Neill said Japan was not coming close to achieving its growth potential, which he estimated at about a 2-3 percent a year increase in goods and services production.