Conflict at G7 Finance Talks
February 9, 2007In addition to currency matters, the ministers are planning to assess worldwide economic prospects, global warming, financial governance in Africa, stalled multilateral trade talks and the operation of global hedge fund markets.
The G7, consisting of the US, Canada, Japan, Germany, France, Italy and Britain, has its own reasons for bringing China closer to the seven-nation bloc.
There was little point in holding discussions about the global economy and interest rates without the participation of a heavyweight like China, German Deputy Finance Minister Thomas Mirow said.
Germany also wants to integrate the other emerging economies Brazil, India, Mexico and South Africa into the G7's discussions on a regular basis, without actually enlarging the group, which, together with Russia, is known as the G8.
Euro zone vs. the Pacific
But it is the Japanese yen that is threatening to drive a wedge between the euro zone on the one hand and Japan and the United States on the other on what steps -- if any -- to take to stem a slide in the currency. The yen has fallen 9 percent against the euro since last April, prompting fears in Europe that Euro zone exports will become less competitive, endangering a fledgling economic recovery.
But Japanese officials seem unwilling to take any action.
"Overall, (the yen's weakness) will have a positive effect," Bank of Japan policy board member Hidehiko Haru told reporters on Thursday.
Japanese Finance Minister Koji Omi, before heading off to Essen, also showed little appetite for action, saying only that the currency's value should reflect the health of the economy.
German carmakers complaining
German Finance Minister Peer Steinbrück, who is hosting the talks in the palatial Villa Hügel mansion in the south of Essen, was nevertheless adamant that the issue be discussed again this time round. German carmakers voiced concern about the issue.
"The yen exchange rate is increasingly becoming an invisible price and cost benefit for importers of Japanese vehicles, giving them a competitive advantage," Bernd Gottschalk, president of the German Automobile Industry Federation told the Frankfurter Rundschau.
Gottschalk said this development was due to market forces and had nothing to do "with the competitive strength or attraction of the products."
US dismissive
In the view of Washington and Tokyo, the Japanese currency is fairly valued by competitive markets, and Japanese officials have said the yen would not be high on the agenda.
"I heard that we are going to have wide-ranging discussions on the domestic and overseas economies, as well as monetary and foreign exchange issues," Omi said. "I want to explain the current situation of the Japanese economy and how a steady recovery is taking place."
The US has made it clear it is far more concerned about the Chinese yuan, which it says should be allowed greater room to appreciate, arguing that an undervalued yuan gives Chinese goods an unfair competitive advantage on the US market and costs US jobs.
Hedge fund angst
Host nation Germany is also expected to pressure for tighter control of highly speculative hedge funds, a step the US and Britain have so far resisted.
Steinbrück urged hedge fund managers to show greater awareness of the political consequences of their dealings.
"If a (domino) falls over, it will take five or six others down with it," he said in a television interview ahead of the meeting. "The result is a serious financial crisis. This cannot be ruled out."
Steinbrück also called for a registration of all the highly speculative funds that operate with foreign capital. Also of concern is "carry trade" under which hedge funds and other investors borrow in one currency at rock bottom interest rates and put the cash into higher-yielding assets elsewhere.
European Central Bank chief Jean-Claude Trichet has described the "carry trades" as a "phenomenon fostered by the low level of volatility in global financial markets."