G7 ministers meet on crisis, fret over protectionism

By Sumeet Desai and Krista Hughes

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.