G20 should not dilute IMF role: EU's Barroso

UNITED NATIONS (Reuters) - The head of the European Commission on Wednesday expressed concern about how much sway the Group of 20 nations should have in overseeing the global economy.

The United States, hosting a summit of the Group of 20 rich and developing countries that begins on Thursday, has drawn up proposals for a "rebalancing" of the world economy as it recovers from the deepest financial crisis in decades.

The U.S. plan envisages the International Monetary Fund reviewing national economic policies on behalf of the G20 to make sure they do not lead to dangerously large deficits or surpluses.

"We (Europe) support the G20 process. So we very much support increased global governance and the G20 is a very important forum we should reinforce," European Commission President Jose Manuel Barroso told Reuters.

"But that reinforcement should not be done at the cost of existing institutions that have specific, well established mandates like the IMF, or even the World Bank. We cannot dilute the IMF's position."

Barroso was speaking on the eve of the two-day G20 summit in the U.S. city of Pittsburgh to discuss ways of preventing another financial crisis.

China's huge trade surplus in recent years gave it a massive stockpile of currency reserves that it invested largely in U.S. government debt, helping to keep down U.S. interest rates.

Low borrowing costs, which many have blamed on the easy-money policies of the U.S. Federal Reserve, spawned a boom in the U.S. housing market. The bursting of the housing bubble ignited the financial crisis.

At the same time, the United States and other countries ran up huge trade and current account deficits.

G20 sources involved in preparing the Pittsburgh summit told Reuters on Wednesday that some European Union countries, notably export powerhouse Germany, were concerned by the latest version of plans drawn up in recent days by Washington.

The sources said the latest changes could mean that the G20 could become a new arena for thrashing out global economic concerns. "And this is a problem for the Europeans, notably Germany," one source said, speaking on the basis of anonymity.

"How can the G20 tell Germany to reduce its surplus? Europeans can take the lead from euro zone ministers but not from the G20," the source said, referring to binding EU rules for national budgets.

"What if the G20 tells countries to do one thing and that conflicts with what the European Commission says? It won't work," the source said.

A version of the U.S. proposal on how to rebalance the world economy, seen by Reuters earlier this week, would give the IMF the role of advising the G20 on the suitability of national economic policies, but there would be no sanctions for countries that ignore the recommendations.

China has given qualified support for the idea of rebalancing the global economy but has said advice from bodies such as the IMF should not be binding.

Barroso, speaking on the margins of the United Nations General Assembly, stressed the EU backed the increasingly important role the G20 has taken on in the wake of the financial crisis.

The group was created after the 1990s Asian financial crisis to give industrial powers such as the United States, Britain, Japan and Germany -- which met as the Group of 7 -- a new way to talk to the wider world.

The first G20 summit took place in November last year, shortly after the collapse of U.S. investment bank Lehman Brothers wrought havoc in global financial markets.

As part of their discussions this week on rebalancing the global economy, G20 leaders are expected to address the issue of IMF reform, notably giving emerging nations such as China and Brazil increased voting power.

Currently, the United States holds 17.1 percent of the IMF's voting power, the euro zone countries hold 32.4 percent, and Switzerland holds 1.6 percent, ensuring dominance of developed nations in the IMF's decision-making.

Washington has proposed a 5 percent shift in voting power from developed countries to some emerging ones. Big developing economies have countered with a proposed 7 percent shift.

Barroso said the 27-nation EU, which would lose out in such a deal, was "ready for discussion" but did not expect any specific negotiations on seats or quotas in Pittsburgh.

"I don't see this detailed discussion in Pittsburgh. But Europe is ready for a discussion," Barroso said.

(Editing by Leslie Adler)