Dollar discomfort thrust onstage for Italy summit

By Brian Love

PARIS (Reuters) - World leaders are bound to express the hope that the worst of the global economic crisis is passing when they meet this week, but they are now under pressure, too, to manage a Chinese challenge to dollar supremacy.

Beijing, which has floated the idea of an alternative to the dollar as world reserve currency, wants the matter -- sensitive in financial markets wary of risks to U.S. asset values -- broached at a July 8-10 summit in Italy, officials say.

Leaders from the Western economic powers and Russia meet in Italy on Wednesday and are joined the day after by leaders from China, India, Brazil and others to discuss global challenges -- chief among them the worst recession in living memory.

German Chancellor Angela Merkel says not to expect any grand initiatives in Italy, largely because governments are already pumping trillions of dollars into bank stabilization and economic stimulus, and also because they have their eyes on a bigger G20 summit in the U.S. city of Pittsburgh in September.

The best the Italians can expect from the meetings in the quake-hit town of L'Aquila, economists say, is a batch of statements that commit the old and new economic powers to keep working together to contain the crisis and, once that is done, envisage new rules for a better regulated global economy.

Carl Weinberg of High Frequency Economics in New York says genuine coordination beyond carefully negotiated communiques is hard to have when governments are spending so much money to tend to their own voters and industries right now.

"In a time when fiscal budgets are stretched and deficits are reaching historic proportions, few governments will be able to find the cash to support foreigners' standards of living. Resources are need to buy jobs at home," he said.

STORM PASSING?

Summit host Silvio Berlusconi, Italy's prime minister, may find it easy enough to broker what the leaders can say about the state of the economy right now, namely that the situation may be stabilizing but the world is far from out of the woods.

The Organization for Economic Co-operation and Development raised its economic forecasts on June 24 for the first time in two years, predicting 4.1 percent GDP contraction in the 30 mostly industrialized countries of the OECD as a whole rather than the 4.3 percent previously envisaged. It forecast a minor 0.7 percent rise in GDP next year instead of further dip.

The tension may rise in L'Aquila though, if, as sources say, Germany's Merkel presses others leaders to say in very explicit terms that they are committed to reverse quickly out of all the heavy spending and debts they have run up once the recovery starts.

Budget deficits are forecast to rise six-fold in the OECD group of countries by 2010, from 2007 levels, to 8.8 percent of GDP from 1.4 percent, the OECD's latest forecasts show.

Washington, London, Paris and Japan, to name just some, do not want to commit so hard and fast to such an "exit strategy," even if they agree to the principle. According to information gleaned from sources, Germany will push the issue but face stiff resistance to anything beyond vague commitment.

Japanese officials cited the OECD latest commentary as a pointer to the potential tenor of the statements that would be issued by G8 leaders. The OECD says fiscal stimulus should not be withdrawn at a pace that jeopardizes recovery.

The most delicate issue leaders will face in economic terms is probably China's push for alternatives to the dollar as the world's reserve currency.