European chill as G20 finance heads meet in SKorea

June 2, 2010 The continent's sovereign debt crisis has seemed like an echo of 2008 when a banking system breakdown in the United States pushed the world into its most serious economic crisis in 70 years and raised fears of another Great Depression.

World markets have tanked amid uncertainty over Europe's government finances. The Dow Jones industrial average declined 7.9 percent in May and has further extended losses in June while the euro has sharply weakened amid fears for the single currency's viability.

Still, the volatility has not been on the scale of the market mayhem in 2008 following the collapse of Lehman Brothers Holdings. But it serves as a reminder of the massive task the G-20 has set for itself: reforming the global financial system to prevent another crisis and ensure economic stability.

South Korea, which assumed the rotating Group of 20 chair this year, is hosting the meeting of finance ministers and central bank governors in the southern port city of Busan on Friday and Saturday.

The G-20 is working on policy recommendations aimed at achieving what it calls "strong, sustainable and balanced growth" to hand to leaders at a pair of summits scheduled for this year - one in Canada later this month and another in Seoul in November.

The forum has been trying to come up with a new financial architecture to manage the global economy in the wake of the 2008 crisis. Proposals include a bank tax, setting new capital standards and establishing "financial safety nets" to help bolster countries such as host South Korea, which have been vulnerable to the whims of traders who can send billions of dollars across borders at the press of a button.

The G-20 has agreed at a series of summits in the United States and Britain since late 2008 on the need for tighter financial regulation to prevent the kind of Lehman-induced turmoil that could potentially sink the global economy.

Coming up with solutions, however, has proved a challenge. The issue of a bank tax to pay for future bailouts has proved divisive. The U.S. and European countries favor the move, while others such as Canada and Australia - whose banks survived the global crisis intact - oppose it.

The G-20, founded in 1999, consists of rich countries such as the United States, Japan, and Germany, emerging powers China, Brazil and India, and developing economies Indonesia and South Africa. Top oil producer Saudi Arabia is also a member.

It maintained a relatively low profile until the shock of 2008, when the disparate grouping shot into the limelight as the key international forum for managing the global financial system, largely stealing the crown from the exclusive Group of Seven after developing countries demanded more say.

Besides following up on issues discussed at their last finance meeting in Washington in April, the G-20 will talk about the European debt crisis, said Yim Jong-yong, a top official at South Korea's Ministry of Strategy and Finance.

They will also be "sending some message of the G-20 to the market regarding the European risk," Yim said in an interview last month.

Some, however, are skeptical the G-20 can accomplish anything regarding Europe's economic problems.

Stephen Lewis, senior economist at London-based Monument Securities, said the key problem for the nations using the euro is that they are hamstrung by the inflexibility imposed by the single currency.

"But G-20 finance ministers cannot afford to recognize this, mindful as they must be of the potentially destabilizing influence, not only in Europe but in the rest of the world, of any widespread loss of confidence in the euro arrangements," he said. "Their discussions are, therefore, likely to lead nowhere."

The U.S. push for China to let the value of its currency, the yuan, appreciate to help address global trade imbalances has long hung over international finance meetings. However, it is doubtful that any G-20 statement from Busan will press China on the issue. At the April meeting in Washington, the communique repeated previous pledges to eliminate imbalances but did not specifically address China's currency.

The meeting also takes place amid a geopolitical distraction in the form of tensions on the Korean peninsula where rivals South Korea and North Korea have been squaring off after Seoul blamed Pyongyang for sinking one of its warships and killing 46 sailors. North Korea denies that.

Though decades of enmity between the two Koreas may not seem like an issue for G-20 finance mandarins to take on, North Korea has a way of muscling in on international trade and economic meetings in Asia. In November 2006 in Melbourne, Australia, for example, G-20 finance ministers and central bank governors condemned North Korea over a nuclear test it carried out the month before.

The G-20 consists of Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.S. and the European Union.