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World economy remains strong, G7 says

The world economy remains strong despite turmoil in financial markets, soaring oil prices and a weak US housing market that will combine to hold back growth, finance officials from the seven leading industrial nations said in a draft statement Friday.

Financial markets are recovering from this year’s crisis sparked by the meltdown in risky US home mortgages, though “uneven conditions are likely to persist for some time and will require close monitoring,” the statement by Group of Seven finance ministers and central bankers said. Market participants should “address many of the shortcomings” highlighted by the crisis, the group said, pointing to a G7 study led by Italian central banker Mario Draghi that is expected to propose tighter oversight rules by next spring. Officials were to release the final statement later Friday, on the eve of the fall meetings of the International Monetary Fund and the World Bank in the US capital.

The G7 is the United States, Germany, Britain, France, Japan, Italy and Canada. With the world economy in its fifth year of expansion, the recent financial market turbulence, high oil prices and weakness in the US housing sector “will likely moderate this growth,” the G7 officials said in Washington. But they said “economic fundamentals continue to be strong and emerging markets are providing critical impetus to the strength of the world economy.”

The leaders of Europe’s three biggest economies - Germany, France and Britain - were a bit more blunt, suggesting Friday that financial markets need tighter rules to track “risks to stability.” At a European Union summit in Portugal, German Chancellor Angela Merkel, French President Nicolas Sarkozy and British Prime Minister Gordon Brown said the EU would discuss proposals in the months ahead. China faced renewed criticism for its currency’s exchange rate, which the US and Europe charge Beijing is keeping artificially low to boost exports. Beijing must do more to let the renminbi appreciate, the G7 statement said. China also figures in another area of concern: the rising power of government-backed funds in oil-rich and emerging nations that are buying into Western companies, a trend that has prompted calls for more oversight and transparency.

European and other G7 nations are seeking more transparency on the funds’ dealings and ways to keep strategic industries out of reach. G7 nations should agree on guidelines for ensuring that authorities know who is behind such funds and should step up dialogue with the countries involved, the officials said. Officials from eight nations, including China, Russia, Saudi Arabia and Singapore, were invited for special talks late Friday with the G7 group on state investment funds. German deputy finance minister Thomas Mirow called it “a very sensitive topic.”

G7 officials also called for major reforms at the International Monetary Fund, saying the 185-nation crisis lending agency must curb spending and give poor and emerging nations a greater say in decision-making. The Washington-based agency, often criticized for imposing stringent market reforms in return for emergency financial aid to struggling governments, has increasingly lost customers - and interest income - as nations turn to other sources of finance. The call for IMF reform mirrors the agenda of former French finance minister Dominique Strauss-Kahn, who replaces Spain’s Rodrigo de Rato as the fund’s president on November 1.

However, no breakthrough on a new power-sharing formula at the IMF and the World Bank was expected at the weekend meetings of the two institutions. Issues being examined by the G7 working group on financial markets includes the role of investment instruments based on US subprime mortgages and whether credit rating agencies - which are supposed to flag risky investments - contributed to the crisis that shook investor confidence this summer. Hundreds of thousands of Americans have lost their homes to foreclosure this year and Treasury Secretary Henry Paulson, host of the one-day G7 meeting, said earlier this week that the housing slump is the biggest risk to the US economy. Record oil prices are another potential threat to growth, but the German central bank’s head said he expects this week’s peaks to be temporary. “Economic growth is not stalling,” Bundesbank president Axel Weber told reporters. (m&c.com)