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INTERVIEW-World must face currency issues-Sarkozy adviser

Published 03/22/2009, 09:21 AM
Updated 03/22/2009, 09:24 AM

* Foreign exchange imbalances must be sorted

* Questions over the dollar and euro

By Crispian Balmer and Yves Clarisse

PARIS, March 22 (Reuters) - World leaders must resolve underlying problems with global currencies, even if the issue is not tackled in next month's financial summit in London, said a senior advisor to French President Nicolas Sarkozy.

Henri Guaino, Sarkozy's influential speech writer, told Reuters that currency disorders had helped trigger the global economic crisis and could not be ignored.

"Putting the monetary system back into shape is a major task and one of the most complicated problems to resolve," he said, speaking in his gilded office in the presidential Elysee Palace.

Last year's financial meltdown has cast doubt on the role of the U.S. dollar as the key global currency and also thrown a spotlight on other concerns, such as long-standing accusations in the West that China undervalues its currency to lift exports.

France pushed for foreign exchange imbalances to be central to the discussions of G20 major world leaders in Washington last year and again in London on April 2, but to little avail.

"It was impossible to put in on the agenda at Washington and probably won't be on the agenda at London," Guaino said, adding: "One cannot deal with the issue of the financial system without at all confronting the monetary issue."

Some European officials have been complaining in private about the difficulties of organising the London summit because U.S. President Barack Obama's economic team is not fully functional, with some key positions still unfilled.

Guaino said an additional problem was that the experts who were putting together the summit agenda were products of the flawed system that gave birth to the crisis.

"It's complicated. One needs to imagine different things, think in different ways ... However, we have still come a long way in the last six months," he said.

INFLATION AHEAD?

Calls for a rethink of the dollar's status as the world's benchmark currency has come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy last week.

Guaino said the European Central Bank (ECB) would also have to adopt new methods to help the sickly euzo zone, saying such solutions were needed at a time when governments around the world faced potential problems financing their bulging deficits.

The ECB has said it is studying "unconventional" policy steps, without giving any timetable for possible action.

Once a fierce-critic of the ECB, Guaino praised its reaction to the financial crisis, adding it faced tough decisions in the months ahead if it was going to stave off deflation on the one hand and possible hyperinflation on the other.

"There will come a time when if America follows an inflationary path, Europe will have to decide whether to follow this inflationary cycle," he said. "One should not have a dogmatic vision of this problem."

The ECB's mandate focuses on price control, but France has long argued it should also set growth targets and some officials within the eurozone feel that if trading partners such as the United States and Britain unleash inflation to eat into their debt mountains, the euro zone will have to follow suit.

The economic crisis has raised fears that the euro zone might split apart, with weaker members destabilised by their precarious finances. Guaino played down such concerns, but said stronger states would be ready to help if necessary.

"In a crisis such as this, no-one knows what tomorrow will bring," he said. (Additional reporting by Emmanuel Jarry' Editing by Matthew Jones)

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