By NATHALIE BOSCHAT in Paris and IAN TALLEY in Washington for WSJ
The global economy's recovery, though still fragile, is easing pressure on world leaders to address lingering financial and economic risks at the upcoming meeting of finance ministers from the Group of 20 leading economies in Paris later this week.
Fears that helped drive cooperation during the peak of the financial crisis are dissipating and the agenda promoted by the G-20's current chairman, French President Nicolas Sarkozy, is proving divisive.
Mr. Sarkozy has outlined an ambitious program to begin restructuring the international monetary system, rebalance the global economy, tame volatile cross-border capital flows, lower inflation where it is a problem and tighten financial regulation.
"We want to implement decisions taken by past G-20 summits, prevent new crises and enlarge the scope of regulation," French finance minister Christine Lagarde said Thursday.
But at this point, the finance ministers going to the meeting are expected to agree only on the shape of negotiations for coming months.
"Don't expect any revolutionary announcements," said Domenico Lombardi, a senior fellow at the Brookings Institution, a Washington think tank, and former International Monetary Fund executive director for Italy. With Europe's debt crises appearing to recede, "leaders have a false sense of comfort…there will be no sense of urgency," Mr. Lombardi said.
Dominique Strauss-Kahn, head of the IMF, last week repeated his warnings that if the G-20 turns into a talk shop—with members figuratively doing more sightseeing in Paris than deal making—the group could undo the progress made in the past two years in reducing risks to economic stability.
"Global imbalances are back, with issues that worried us before the crisis—large and volatile capital flows, exchange rate pressures, rapidly growing reserves—on the front burner again, " Mr. Strauss-Kahn told an audience of economists. "Left unresolved, these problems could even sow the seeds of the next crisis," he said.
U.S. officials remain concerned about the potential for Europe's debt crisis to spread. One of Washington's highest priorities will be encouraging eurozone leaders to resolve politicial disagreements over how to boost the firepower of the bailout fund they have organized and to assure markets they'll be able to meet their governments' future financing needs.
However, U.S. officials are planning to take a less active role in Paris than at the past G-20 meetings, saying they prefer to let the process play out and allow others feel they can contribute.
Few G-20 countries have yet rallied behind Mr. Sarkozy, who has made reforming the international monetary system the crux of his G-20 program, saying currency volatility weighs on global growth.
Officials in the U.S., France, and in many developing countries complain their exports are hurt by China's policy of holding a lid on the value of its currency, the yuan, and have called for Beijing to let it rise more quickly in value.
France is trying to address the issue indirectly by advocating a bigger role for the yuan in global currency transactions, seeking to include it as part of the currency in which the IMF lends, known as Special Drawing Rights (SDRs).
Paris believes this will encourage China to loosen its tight grip on the yuan's value.
The Obama administration wants Beijing to pick up the pace of yuan appreciation, but believes it achieved a measure of success on the issue after Chinese President Hu Jintao's visit to Washington last month.
Mr. Sarkozy also believes that expanding the use of the IMF's currency will build a more stable monetary system because emerging nations won't have to build up large cash reserves—primarily dollars—as insurance against currency crises. Reducing these economies' dependence on the dollar could make them less vulnerable to the effects of changes in U.S. Federal Reserve policy.
One area where the G-20 may make limited progress is on developing common rules on when and how to raise barriers to foreign capital flowing into emerging market economies.
Finance ministers from developing countries have complained that loose monetary policy in the U.S., Europe and Japan has caused foreign capital to rush into their economies, threatening to overheat them.
Several governments also blame the Fed's policy, specifically, for fueling higher inflation around the world, a charge Fed officials reject.
In the past year, several emerging-market governments have adopted capital controls, such as taxing short-term investments or reducing the interest that banks can pay to foreigners.
But here, again, there are divisions: emerging markets do not want to limit their ability to stem inflows, while rich nations want capital controls to be used as a last resort.
France, Germany and Italy—the three eurozone countries that are part of the G20—are focused on the fall-out from Axel Weber's decision last week to resign as president of Germany's Bundesbank, after announcing he would not pursue the presidency of the European Central Bank. His decision on the ECB job appears to have owed much to French resistance to his candidacy. The chain of events has caused the German government acute embarrassment, severely testing the resolve of France and Germany to work together on Paris's G-20 agenda and Berlin's plans for overhauling the eurozone.
The G-20 has made little progress on one of its principal strategies for narrowing global trade imbalances. Under the counsel of the IMF, the G-20 was supposed to coordinate a strategy of shared policy adjustments, to be called the Mutual Assessment Process, designed to boost global growth by several percentage points. Member countries failed to agree last year on what all those policies should be, so the U.S. tried a separate approach, attempting to the G-20 nations to agree to keep their trade deficits and surpluses within a targeted range. That idea failed to win agreement. Now, the G-20 countries are trying to draft a set of economic measurements that would guide policies along the lines of the shared growth strategy. But, say officials close to the matter, members are still bickering over what those indicators should be.
—Geoffrey Smith in Frankfurt and Damian Paletta in Washington contributed to this article
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