G8 sees economy still in peril, falters on climate

L'AQUILA, Italy (Reuters) – G8 leaders believe the world economy still faces "significant risks" and may need further help, according to summit draft documents that also suggest failure to agree climate change goals for 2050.

Progress on the environment was impeded by Chinese President Hu Jintao returning home due to unrest in northwestern China in which 156 people have died. Before he left, summit host Silvio Berlusconi spoke of Chinese "resistance" on climate goals.

Documents seen by Reuters before the G8 summit began on Wednesday cautioned that "significant risks remain to economic and financial stability" while "exit strategies" from pro-growth packages should be unwound only "once recovery is assured."

"Before there is talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that has been announced actually gets delivered," Canadian Prime Minister Stephen Harper said.

That chimed with comments from the International Monetary Fund, which said it believed the global economy was starting to pull out of recession but recovery would be sluggish and policies needed to remain supportive.

Leaders met in L'Aquila, a mountain town wrecked by April's earthquake and a fitting backdrop to talks on a global economy struggling to overcome the worst recession in living memory.

The Group of Eight -- United States, Germany, Japan, France, Britain, Italy, Canada and Russia -- kicked off with debate on the economic crisis, after what one analyst called a "reality check" in recent weeks on the prospects for rapid recovery.

G8 leaders badly underestimated the economic problems facing them when they met in Japan last year and were expected to focus on what must be done to prevent another meltdown.

"Although there have been signs of stability in the economy and the sentiment has improved, the real economy has not recovered yet with job and wage conditions still stagnant," said Takao Hattori, senior strategist at Mitsubishi UFJ Securities.

But few big initiatives were expected as the G20, a broader forum that also includes the main emerging economies, is tasked with formulating a regulatory response to the crisis and meets in September in Pittsburgh after an April summit in London.

DOLLAR DEBATE PLAYED DOWN

Not mentioning China's push for a sensitive debate about a long-term alternative to the dollar as global reserve currency, the draft talked only of global "imbalances." G8 diplomats had said this might be the only oblique reference to currency.

"Stable and sustainable long-term growth will require a smooth unwinding of the existing imbalances in current accounts," read the draft prepared for the G8 talks.

China complains that dollar domination has exacerbated the global crisis and worries that the bill for U.S. recovery poses an inflation risk for China's dollar assets, an estimated 70 percent of its official currency reserves.

Analysts said the decision not to refer to this directly could remove a destabilizing factor on currency markets.

U.S. President Barack Obama was expected to make his mark on his first G8 summit by chairing Thursday's meeting in L'Aquila of the 17-nation Major Economies Forum, whose members account for about 80 percent of global greenhouse gas emissions.

MEF ministers holding last-minute preparatory talks failed to close the gap between U.S. and Europe on the one hand and emerging powers like China and India on the other hand on the goal of halving global greenhouse gas emissions by 2050.

A draft MEF document dropped any reference to this and aimed instead for agreement on the need to limit the average increase in global temperature to 2 degrees Celsius (3.6 degrees Fahrenheit) since pre-industrial times.

Cindy Baxter of Greenpeace said G8 leaders were "watering down climate ambitions," a bad omen for December's U.N. climate summit in Copenhagen seeking a successor to the Kyoto pact, since emission cuts are a prerequisite for limiting temperature rises.

Developing nations, present in large numbers at the expanded G8 summit with more than 30 world leaders invited, argue that they have to consume more energy to end poverty and that rich nations must make deep emission cuts of their own by 2020.

The packed first day was due to wrap up with talks on an array of international issues, including Iran's post-election violence and nuclear program. However, these are unlikely to lead to any immediate action, such as a tightening of sanctions.

One area where a breakthrough is possible is trade. A draft communique suggested the G8 and "G5" developing nations would agree to conclude the stalled Doha round of trade talks in 2010.

Launched in 2001 to help poor nations prosper through trade, the talks have stumbled on proposed tariff and subsidy cuts.

Leaders will also discuss a U.S. proposal that rich nations commit $15 billion over several years for agricultural development in poor countries to ensure food supplies.