G7 ministers meet on crisis, fret over protectionism

U.S. Secretary of Treasury Timothy Geithner arrives in central Rome February 13, 2009. Finance ministers and central bankers from the G7 industrial powers plus Russia meet in Rome on Friday for the first of a series of meetings that will show whether governments worldwide can respond effectively to the worst financial and economic crisis since World War Two.

ROME (Reuters) - G7 finance ministers converged on Rome to discuss the economic crisis amid warnings from Germany and Britain on Friday that the world could revert to the dark days of the 1930s if governments resorted to protectionism.

The G7 industrial powers, all in recession or just about, are under pressure to prove they can work together to stop the rot rather than engaging in a "beggar-thy-neighbor" battle where each country fends for itself at others' expense.

Officials said the meeting's final statement would refer to the need for free trade, but avoid giving a new steer on exchange rates, another area of tension in world trade competition.

"The fight against protectionism has never been more needed than today," British Finance Minister alistair Darling told Reuters in an interview.

"We will have to do everything to ensure history does not repeat itself," German Finance Minister Peer Steinbrueck told parliament.

Steinbrueck cited the "buy American" clause in an economic stimulus package the U.S. Congress was due to approve just as the ministers of the G7 -- the United States, Japan, Germany, Britain, France, Italy and Canada -- were meeting in Rome.

Darling told Reuters he had discussed the issue with new U.S. Treasury Secretary Timothy Geithner, adding:

"I think the U.S. is very aware of its obligations to the world."

Steinbrueck said he too had discussed his concerns with U.S. Treasury Secretary Geithner, and said Geithner shared the worries about the dangers of protectionism.

A U.S. statement issued by the U.S. Treasury put the emphasis on the need for a strong response from governments worldwide to the downturn -- a reference to things like the $787 billion stimulus plan being pushed through Congress.

That plan includes a clause that requires use of U.S. steel and manufactured goods in the infrastructure-building projects where the bulk of the public money is going, a "Buy American" provision that is worrying other G7 countries.

WORSE ON WAY

Fresh data from Europe served a reminder of the scale of the economic downturn and Dominique Strauss-Kahn, managing director of the International Monetary Fund, said the worst had probably still to come.

In the last quarter of 2008, economic output in the euro zone shrank more than any quarter on record and the picture was much the same in the 27-country European Union -- with GDP down 1.5 percent in both cases versus the preceding three months.

Italian Prime Minister Silvio Berlusconi said the Rome G7 would focus on improved regulation of the financial sector, where the current trouble began.

"The problem is that the effect on the real economy, for the most part, is still to come," the IMF's Strauss-Kahn said.

All of the large G7 economies contracted in the last quarter of 2008 and even rising stars such as China are slowing hard, even if they are not in quite the dire state of the more mature economies.

Like Berlusconi, French Economy Minister Christine Lagarde put the focus on the need for better regulation of banks and the financial sector.

She said this was the ultimate priority but that it risked being neglected as governments focus on reflating their economies with public spending programs and industry bailouts.

"The sense of priority has varied a bit and my fear is that we lose sight of what is in my view the key priority for restoring confidence, which is this platform of sound and safe regulations," she said.

CURRENCY JITTERS

In the currency market, the euro weakened after Friday's grim news on GDP and the British pound rose while the yen too lost some ground as traders squared positions ahead of the G7 and weekend.

G7 finance ministers are keen not to fuel further tension at the moment over competition via currency values, according to information gathered from pre-G7 briefings with officials.

"As always the G7 will discuss the exchange rate situation and I don't expect major changes in the reference," EU Monetary Affairs Commissioner Joaquin Almunia said.

"We see that volatility has increased ... but taking into account the present levels of the different currencies we are now closer to normal values of these currencies than we were a few months ago,"

Friday's currency moves, though, are in line with concerns that some officials have expressed ahead of the meeting, namely that excessive weakness in the pound is unwanted as far as mainland European countries are concerned and the fact that Tokyo would not like to see the yen rise endlessly.

The ministers and central bankers were set to meet first for a working dinner and then reconvene on Saturday for a gathering that is billed more as a staging-post session ahead of a summit on April 2 of the G20 countries, a forum that includes the big emerging economies as well.

(Writing by Brian Love, Editing by Patrick Graham, Rome G7 newsroom)