G7 powers head to Rome as economic crisis rages

G7 finance ministers headed to Rome to discuss the global economic crisis on Friday with a warning from Germany that the world could be plunged back into the dark days of the 1930s if governments resorted to protectionism.

The G7 industrialised economic powers, all in recession, are under pressure to prove they can work together to stop the rot rather than engaging in a battle of “beggar-thy-neighbour”, and Berlin made it clear the latter was an increasingly real risk.

“We will have to do everything to ensure history does not repeat itself,” German Finance Minister Peer Steinbrueck told Parliament a few hours ahead of the Rome meeting.

“Right now, I think Germany has a huge interest in ensuring, at international meetings, that the world does not make the same mistakes it made in the 1930s.”

He cited the “buy American” clause in an economic stimulus package the United States Congress is due to vote on just as the finance ministers of the G7 powers—the US, Japan, Germany, Britain, France, Italy and Canada—meet over dinner in Rome.

Fresh data from Europe served a reminder of the scale of the economic downturn and Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), said the worst was probably still to come.

In the last three months of 2008, economic output in the 16-country euro currency zone shrank more than any quarter on record and the picture was much the same in the 27-country European Union—with GDP down 1,5% in both cases versus the preceding three months.

Italian Prime Minister Silvio Berlusconi said the Rome G7 would focus on improved regulation of the financial sector, where the current trouble began when a credit boom ended.

“The problem is that the effect on the real economy, for the most part, is still to come,” the IMF’s Strauss-Kahn said.

All of the G7 economies contracted in the last quarter of 2008 and even rising stars such as China are slowing hard if not in quite the dire state of the more mature economies where the trouble began.

Like Berlusconi, French Economy Minister Christine Lagarde put the focus ahead of the Rome meeting on the need for better regulation of banks and the financial sector.

In an interview in London’s Financial Times, she said this was the ultimate priority but that it risked being neglected as governments focus on reflating their economies with massive public spending programmes and industry bailouts.

“The sense of priority has varied a bit and my fear is that we lose sight of what is in my view the key priority for restoring confidence, which is this platform of sound and safe regulations,” she said.

The ministers and central bankers were set to meet first for a working dinner and then reconvence on Saturday for a gathering that is billed more as a staging-post session ahead of a summit on April 2 of the G20 countries, a forum that includes the big emerging economies as well as the G7 ones.