Italian quake town dramatises G8 summit challenges

By Stephen Brown

L'AQUILA, Italy (Reuters) - G8 leaders will discuss next week when trillions of dollars in support to global economies could safely be withdrawn from recession-hit financial systems, and a proposal to undercut the dollar's dominance.

Italy's Prime Minister Silvio Berlusconi has moved the G8 summit to a medieval town flattened by earthquake, a grim metaphor for the task leaders face on the economy, and says it will be a meeting of "sobriety and solidarity" with a focus on the developing world.

He says "90 percent of the world economy" is represented by the 40 nations and world bodies attending and hopes the summit will exude confidence that the worst of the crisis is over.

But diplomats caution that the July 8-10 meeting, sandwiched between G20 summits in London and Pittsburgh dealing exclusively with the global financial crisis, will not produce "fireworks."

The summit will kick off with talks about whether the crisis is ending, if stimulus packages have worked and if time is ripe to discuss "exit strategies" -- withdrawing the trillions of dollars in stimulus packages that have propped up the global economy in deep recession.

It will also study the future governance of the world economy, with Berlusconi calling it "a G8 of rules."

"But don't expect Berlusconi to come out with a code for global business conduct in L'Aquila, and don't expect (German leader Angela) Merkel to come out with a charter for growth at Pittsburgh either," warned one G8 diplomat.

On the second day, when the G8 (the United States, Japan, Germany, France, Britain, Italy, Canada and Russia) are joined by emerging powers like China and India for "G14" talks, China favors including a sensitive world currency debate.

G8 sources told Reuters China wanted to debate a new global reserve currency, saying the dollar's ubiquity had worsened the crisis. This is sensitive for markets as perhaps 70 percent of China's $1.95 trillion (1.18 trillion pounds) in official reserves are in dollars.

"This financial crisis has fully exposed some shortcomings in the international currency system," said the deputy Chinese foreign minister, He Yafei, while playing down talk that China had insisted on the debate being on the table in L'Aquila.

LEADERS IN BARRACKS

Summit leaders will stay in barracks in the mountain town of L'Aquila, hit by an earthquake in April which killed 300 people. Despite the note of austerity, earthquake survivors hope the summit will bring aid to rebuild their homes from the rubble.

"Our economy in L'Aquila is at a standstill. We live in the tents, eat in the tents and have no money to spend," said Maria Di Paola in the village of Onna, wiped out by the quake. "We hope the G8 will bring in cash."

Amid debate about whether the G8 is suitable for tackling global challenges or is an increasingly irrelevant rich nations' club, Chancellor Angela Merkel said L'Aquila would "make clear that the existing forum needs to be expanded".

Other members, such as Japan and Canada, like its compact format while current chair Italy favors a "flexible format" G8 with more formal ties to the major emerging powers.