G8 to voice cautious optimism on economy:

Crisis exit strategy remains a flashpoint

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 under pressure, too, to manage a Chinese challenge to decades of dollar supremacy.

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

With so much of its reserves invested in U.S. assets, BeiJing needs to ensure that its longer-term goals do not spook markets in the short term and hit the dollar's value - a point Vice Foreign Minister He Yafei made in Rome on Sunday.

"The U.S. dollar is still the most important and major reserve currency of the day, and we believe that that situation will continue for many years to come," He said.

Global Challenges

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 on the economy, largely because governments are already pumping trillions of dollars into bank stabilisation 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, are 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.

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 stabilising but the world is far from out of the woods.

The Organisation 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 industrialised 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 a further dip.

The tension may rise in L'Aquila though, if, as sources say, Germany's Merkel presses others 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.

Fiscal Stimulus

Japanese officials cited the OECD's latest commentary as a pointer to the potential tenor of the statements that would be issued by G8 leaders.

The most delicate issue leaders will face in economic terms is probably China's push for consideration of alternatives to the dollar as the world's reserve currency. The dollar lost a cent versus the euro at one stage last week when Reuters reported sources as saying Beijing wanted the matter debated.

Reuters