G-20 Leaders Struggle to Break Deadlock

SEOUL, South Korea -- The leaders of major rich and developing nations struggled Thursday to break a deadlock on how to fix problems cramping the global economy as President Barack Obama insisted that a strong United States is crucial for a wider international recovery.

Obama and other leaders from the Group of 20, a gathering that encompasses developed countries such as Germany and the U.S. along with emerging giants like China and Brazil, face a host of prickly issues at a two-day summit in Seoul, including state manipulation of currencies, trade gaps and protectionism.

Established in 1999 and raised to summit level two years ago, the G-20 has become the centerpiece of top-level efforts to revive a struggling global economy and to prevent a financial meltdown of the kind seen two years ago.

But compromise among G-20 countries has looked difficult in recent weeks. It is divided between those like the United States that see the top priority as getting China to let its currency rise and those irate over U.S. Federal Reserve plans to pump $600 billion of new money into the sluggish American economy, effectively devaluing the dollar.

Over the past two days, government ministers and senior G-20 officials -- called "sherpas" in diplomatic-speak because they do much of the groundwork -- have labored to hammer out a substantive joint statement to be issued at the end of the summit Friday.

"Major countries have been deadlocked, so the agenda is likely to be handled when leaders gather at the formal reception and working dinner," said a summit spokesman, Kim Yoon-kyung.

Leaders gathered Thursday evening at Seoul's grand National Museum of Korea for the dinner that marks the official start of the two-day event. They were greeted by sentries dressed in royal garb and escorted by children in traditional Korean dress.

Outside, a few thousand protesters rallied against the G-20 and the South Korean government. Some scuffled with riot police but the march from Seoul's main train station was largely peaceful.

The summit began on a low note for Obama and South Korean President Lee Myung-bak, whose trade ministers failed to reach a deal on a long-stalled free trade deal that the leaders were determined to settle this week.

An agreement, besides providing a political boost for both leaders, could have helped shift the tone for a summit where common ground looks increasingly narrow and nations appeared set to defend their short-term economic interests above all else.

In a letter to the Group of 20 rich and major developing nations, Obama warned that the U.S. cannot remain a profligate consumer using borrowed money, and needs other countries to pull their weight to fix the world economy.

"The most important thing that the United State can do for the world economy is to grow, because we continue to be the world's largest market and a huge engine for all other countries to grow," Obama said at a news conference.

A major issue confronting the G-20 is how to craft a new global economic order to replace one centered on the U.S. running huge trade deficits while countries such as China, Germany and Japan accumulate vast surpluses. The U.S. runs a trade deficit because it consumes more foreign products than it sells to others.

Obama made it clear he is pitching for a balanced recovery across the globe -- tougher to achieve when national interests collide.

"The foundation for a strong and durable recovery will not materialize if American households stop saving and go back to spending based on borrowing," Obama wrote. He pushed for exchange rates based on the market and no more "undervaluing currencies for competitive purposes."

The message was primarily aimed at China, whose trade surplus with the U.S. is bigger than with any other trading partner. The U.S. contends that China deliberately undervalues its currency, the yuan, which gives it is exports an unfair competitive edge.

A U.S. proposal to limit current account surpluses and deficits to 4 percent of gross domestic product as a way to reduce trade gaps has met with opposition.

"Targets are neither economically appropriate or appropriate from a financial perspective," German Chancellor Angela Merkel said Thursday. "Current account balances are hard to target. What's important is that we don't resort to protectionist measures." Germany is the world's second-biggest exporter after China.

British Prime Minister David Cameron, who last month announced severe government spending cuts of more than $125 billion (80 billion pounds) over four years, said nations with large budget deficits have a responsibility to deal with them.

"The alternative isn't some wonderland of continuous growth, the alternative is the markets questioning your economy, it's your interest rates rising, it's confidence falling and you see your economy go into the danger zone that others are in," Cameron said at a business summit.

Indian Prime Minister Manmohan Singh and Cameron agreed during bilateral talks Thursday that the leaders must engage in broader discussions.

"Both of the leaders felt there was no universally agreed diagnosis as to what ails the world economy," said Indian Foreign Ministry spokesman Vishnu Prakash.

In the lead up to the summit, the currency spat intensified after the U.S. Federal Reserve last week announced plans to purchase $600 billion in long-term government bonds to try to drive down interest rates, spur lending and boost the U.S. economy.

Analysts say it could spark an influx of cash into the financial markets of emerging nations in search of higher returns, making their currencies stronger, their exports more expensive and creating bubbles in stocks and other assets. While a cheaper dollar would benefit U.S. exports, it could also trigger a so-called currency war as countries race to devalue their currencies.

After the G-20 summit, many of the leaders head to Yokohama, Japan, for the Asia-Pacific Economic Cooperation forum summit this weekend. They are expected to agree to take steps toward a sweeping Pacific-wide free trade agreement but the idea has faced resistance from some members.