After just six weeks as NATO secretary-general, Anders Fogh Rasmussen has his first crisis. The alliance may be slowly bleeding in an intractable war in Afghanistan, but the immediate cause is the U.S. administration's decision to shelve a planned missile shield due to have been built in Poland and the Czech Republic.

The shield, energetically promoted by former President George W. Bush, was designed to intercept a small number of missiles fired by Iran or some other "rogue state". But Russia saw it as a threat to its own nuclear deterrent and NATO's new east European members saw it as a useful deterrent against Russian bullying, by putting U.S. strategic assets on their soil.

President Barack Obama's decision to drop plans to install it on Polish and Czech territory leaves those former Soviet satellites feeling betrayed -- because they expended political capital to win parliamentary support -- and more exposed to a resurgent Russia, especially after its use of force against Georgia last year.

Obama's move is clearly part of a warming of U.S. relations with Moscow from which Washington hopes to gain help in return on supply routes to Afghanistan, pressure on Iran to rein in its nuclear programme, and an agreement on radical cuts in nuclear arsenals. But this "reset" of U.S.-Russian relations has only exacerbated the rift within NATO over Russia.

The three Baltic states and Poland were particularly critical of NATO's low-key response to Moscow's military action in Georgia. Some said the refusal of west European allies led by Germany and France to agree at a NATO summit last year to putting Georgia and Ukraine on a path to NATO membership emboldened the Kremlin to act. President Dimitry Medvedev's harsh attack on Ukraine's leader in an open letter last month fanned their fears of Russian bullying of its neighbours.

East European officials cite Moscow's playing with the gas taps and trade disputes, and its apparent determination to keep its Black Sea fleet in the Crimean port of Odessa Sevastopol beyond a 2017 deadline agreed with Ukraine as part of a strategy of tension intended to reverse the "colour revolutions" in Kiev and Tbilisi, and bring other former Soviet republics to heel.

All that makes it a particularly awkward moment for Rasmussen to deliver his inaugural keynote speech on NATO-Russia relations on Friday in Brussels. The former Danish prime minister has put a few noses out of joint in his first weeks by making clear he intends to run NATO in a more results-oriented way, leaving less room and time for ambassadors in the North Atlantic Council to debate any idea to a standstill. He has set strict time-limits on council meetings, streamlined flabby agendas and outsourced the drafting of a new Strategic Concept to a group of 12 experts led by former U.S. Secretary of State Madeleine Albright, on which not all allies are represented.

His personal management style and high media profile (monthly news conferences, a blog and Twitter chatter) has sharpened the traditional Kabuki dance in which a new boss and the old board flex their muscles at each other in mutual suspicion, insiders say. It is the first time a former prime minister, used to running a government and to talking to fellow national leaders, has been picked for the job. Previous secretaries-general were former defence or foreign ministers, more accustomed to being servants of the member nations.

Both camps within NATO (which privately brand each other the "Friends of Russia", and the "Cold Warriors") will be watching every word of Rasmussen's Russia speech to ensure he does not depart from alliance policy. The fact is that NATO has been unable to agree on an overall policy towards Russia since the 1990s, when it declared that Moscow was no longer an adversary.

Rasmussen hopes to launch NATO's own modest "reset" of ties with Russia, offering closer cooperation on Afghanistan, a joint threat assessment and work on non-proliferation of nuclear weapons. NATO officials have received assurances that Moscow will respond positively and breathe new life into the NATO-Russia Council.

None of that will assuage NATO's east European members, who are likely to press harder now for practical steps to give credibility to the alliance's Article V mutual defence commitment. That could involve drafting military plans to reinforce the Baltic republics and Poland, and holding joint military exercises on those countries' territory. The French and Germans have resisted such ideas in the past as unnecessarily provocative to Moscow. If NATO cannot agree to such moves, the United States may have to do more on its own to compensate its jilted friends.

(note: corrects Odessa to Sevastopol in 6th paragraph)

It's not often you get to lift the hood and watch a power struggle going on in the engine room of General Motors. But the vice-president of GM Europe, John Smith, has just provided tantilising details of the arguments over the rival bids for Opel/Vauxhall, the main European arm of the fallen U.S. auto giant. Smith is the chief negotiator on the sale of Opel.

In a blog apparently intended to reassure Opel staff, but accessible to the public, he insisted GM had not specified a preferred bidder. But he made clear his own preference for the bid from Belgian financial investor RHJ International, which is loosely related to U.S. private equity fund Ripplewood, over the offer by Canadian-Austrian car parts maker Magna and its Kremlin-backed Russian partner Sberbank.

Smith's post is entitled "Clearing the Air" and was ostensibly written to clarify GM's intentions and dispel erroneous reports ascribed to interested parties. But his account shows just how poisonous the atmosphere appears to be between GM and Magna, and GM and the German government, which backs Magna's bid. It also suggests that the air is not too clear within GM's top management either.

Specific to the Magna bid, which is clearly preferred by several politicians and the Labor Bench, the bid presented to GM varied from the negotiations we had in the previous weeks and contained elements around intellectual property and our Russian operations that simply could not be implemented...

The bid from RHJI is completed and would represent a much simpler structure and would be easier to implement. It would require less monetary participation by the government and would keep our global alignments solid, while still creating an independent Opel/Vauxhall organization in Germany. This remains a reasonable and viable option to be considered as the very difficult issues around the Magna negotiations continue to be worked.

The following day, (July 29) Smith felt the need to add an update denying that GM was seeking to buy back control of Opel at a later date, or that it had asked the U.S. Treasury for financial assistance to restructure Opel. The former is strange since several sources have said a buy-back option is a key feature of RHJ's offer and not of Magna's.

So what is going on here and why did the chief negotiator feel the need to explain himself in semi-public in this way? One can only speculate, but one plausible theory is that GM's top management is split. This would not be surprising since the U.S. government now holds a controlling stake in the shrunken GM that emerged from bankruptcy, and Washington is probably being lobbied heavily by Berlin to support the Magna bid. A senior aide to Chancellor Angela Merkel discussed Opel with the U.S. Treasury on Wednesday.

If GM were to choose RHJ in defiance of Berlin's clearly stated wishes, it would spark a crisis with political ramifications just as Germany is entering the final phase of campaigning for a Sept. 27 general election. Might the Obama administration not lean on GM's top management in Detroit to avoid being branded as a potential job-killer in Germany? If so, Smith's blog may be a doomed effort to make business arguments prevail over politics.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Higher taxes? Lower public spending? Devaluation? Inflation? Investment in green growth?

European governments are pointing in very different directions as they debate an exit strategy from the global financial crisis. Despite European Union efforts to coordinate economic policy, there are clear signs that the main European economies will charge off in disarray towards separate exits.

Germany is stressing an early return to fiscal discipline despite economists’ warnings against a premature withdrawal of fiscal stimulus. Berlin has just amended its constitution to anchor a timetable for a balanced budget, and is holding down labour costs to promote an export-led recovery.

“This means that the German constitution now forces a very harsh austerity stance on Germany for the coming years,” economist Sebastian Dullien wrote on the Eurozone Watch blog.

“For the rest of (the euro area) this means that after the crisis, Germany will consolidate its budget much earlier and much quicker than the rest of Europe,” he said, arguing it would weaken domestic demand and hurt growth.

German and EU officials say the amendment merely enshrines existing European budget rules and note that a get-out clause allows parliament by a simple majority to set aside the target.

By contrast, French President Nicolas Sarkozy outlined plans last week to raise a big public loan to finance investment in “tomorrow’s growth”, despite warnings from the European Central Bank and the Bank of France against any increase in debt.

France’s deficit is set to remain higher than Germany’s. But with an eye to re-election in 2012, Sarkozy explicitly ruled out austerity or tax increases to pay off mounting public debt, although he talked of cutting wasteful spending, controlling health costs and possibly raising the legal retirement age.

In Britain meanwhile, the opposition Conservatives, scenting victory in a general election due within a year, are preparing to roll back public spending to curb a runaway deficit incurred partly to rescue wayward banks and combat the recession.

Conservative finance spokesman George Osborne has been quoted as telling business leaders: “After three months in power we will be the most unpopular government since the war.”

The Europeans face a common challenge — adapting to lower trend growth while coping with mass unemployment, an aging population and overstretched public finances after the deepest recession since the 1930s.

Different national economic cultures, as well as election timetables, explain the wide diversity of policy responses.

Britain has let the pound slide on foreign exchanges to help restore competitiveness after its banks were hard hit by the credit crunch. The British are more sanguine about the prospect of higher inflation after the crisis to work down public debt.

Influential French officials, such as Sarkozy’s political adviser Henri Guaino, see higher inflation as inevitable, and not necessarily unwelcome, and worry about too strong a euro.

Germany is allergic to inflation out of bitter historical experience in the 1920s and wants a strong currency.

Its Bundesbank president, Axel Weber, has said the ECB will not be influenced by politics in withdrawing liquidity once recovery is under way.

ECB President Jean-Claude Trichet has made clear that his institution, which defines its mandate of maintaining price stability as keeping inflation below but close to 2 percent, will not allow prices to surge.

Despite these deep-seated differences, there is one key area on which the Europeans ought to be able to agree.

The EU has taken global leadership in the last decade in moving towards a low-carbon economy based on cuts in greenhouse gas emissions and promoting renewable energy. Under President Barack Obama, the United States is also pushing for the green economy as a source of growth and jobs.

If European leaders joined together in a continent-wide investment and tax incentive programme to promote clean energy, energy efficiency and low-carbon innovation, they could boost the growth potential on which sound public finances depend.

(editing by David Evans)

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

A wind of change is blowing through Iran, where hardline President Mahmoud Ahmadinejad faces an increasingly tough battle for re-election on Friday.

Whether or not Ahmadinejad fends off reformist Mirhossein Moussavi and two other candidates after a turbulent campaign, Iran is likely to be more open to talks with the United States on a possible “grand bargain” to end 30 years of hostility. Tehran will not give up its nuclear program, whoever wins. But it may be persuaded to stop short of testing or making a bomb.

There is a sense of deja vu about this election.

In 1997, a soft-spoken reformist, Mohammad Khatami, swept to a surprise landslide victory over the establishment candidate, Ali Akbar Nateq-Nouri, on a tide of young people and women clamoring for greater freedom. But after his supporters won control of parliament, the conservative clerical establishment used unelected institutions in Iran’s complex power system to neutralize Khatami and block his liberal agenda.

There is, however, a crucial difference this time.

The United States, which had a policy of “dual containment” of Iran and Iraq at the time, never seized the opportunity of Khatami’s victory to open a dialogue. Now, U.S. President Barack Obama is waiting with an outstretched hand and has made crucial gestures by accepting the Islamic Republic by its name, offering talks without pre-conditions and admitting Washington’s role in ousting nationalist Prime Minister Mohammad Mossadeq in 1953.

Obama’s respectful overtures in his Cairo speech calling for a new start with the Muslim world have played into the Iranian campaign.

Moussavi, a graying architect who was prime minister during the Iran-Iraq war in the 1980s, shortly after the 1979 Islamic Revolution, has become the unlikely standard bearer of a mass movement for change. Tehran is teeming nightly with green-clad young men and women demonstrating joyously against the fundamentalist Ahmadinejad. It will be hard to get the genie back into the bottle even if the incumbent wins.

The president is only number two in the hierarchy after Iran’s supreme leader, Ayatollah Ali Khamenei, who has the final say on all foreign policy and national security decisions, especially on the nuclear program, and controls the elite Revolutionary Guards.

The president is constrained by other powerful bodies such as the conservative judiciary, the Guardian Council, which can veto legislation and bar election candidates on Islamic grounds, and the Expediency Council, which arbitrates differences among the institutions and is headed by influential ex-President Akbar Hashemi Rafsanjani.

Policymaking involves endless bargaining among multiple stakeholders, but the supreme leader is the ultimate arbiter. For example, he is believed to have vetoed a proposal by Iran’s nuclear negotiator in 2006 to accept a temporary freeze on expanding uranium enrichment in order to launch negotiations with major powers represented by the EU’s Javier Solana.

While both main candidates say the nuclear program is irreversible, Ahmadinejad has ruled out further negotiations while Moussavi has advocated fresh talks.

Khamenei has endorsed Ahmadinejad’s re-election bid, but he is sensitive to public opinion and must be deeply worried by rifts that have opened in the establishment during the campaign.

The fissures were dramatized when Rafsanjani accused Ahmadinejad of lying and demanded that the leader call the president to order for airing corruption allegations against Rafsanjani during a televised debate. The ex-president warned Khamenei there could be an explosive situation after the election if he did not “extinguish the fire”.

This does not mean that Iran is on the brink of another revolution. The Islamic system is deeply rooted and the security forces have shown in the past they act swiftly and ruthlessly to crush any challenge.

Khamenei’s chief aim is to ensure the Islamic system’s survival. Public pressure for change and heightened factional tension should convince him, despite his deep suspicion of the United States, that it is worth exploring a deal with Obama.

Many experts believe that by completing the nuclear fuel cycle under international supervision, but without testing or building a weapon, Iran can deter its enemies and entrench its regional influence without incurring an Israeli or American strike. To spurn Obama’s offer and press ahead with an unsupervised nuclear program would invite such intervention and could put the regime’s survival at risk.

So whoever wins the vote, it could be “game on” in Tehran.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

India’s voters have just given stalled world trade talks their biggest potential boost since the financial crisis spurred fears of rising protectionism.

By handing the governing Congress party a decisive victory, unshackled from the Communist party, Indians have created a chance to break a deadlock in negotiations on global commerce that foundered last year on a U.S.-Indian spat over farm trade.

Trade Minister Kamal Nath, whose dogged defence of India’s small farmers helped sink the talks, told Reuters on Sunday: “We believe that it is even more important to conclude the Doha round as one of the measures to extricate the global economic from going into a tailspin, and India is willing to play a leadership role in this.”

The unexpectedly clear Indian vote coincides with signs that U.S. President Barack Obama’s administration, after striking a protectionist tone to appease blue-collar voters, is warming to completing a World Trade Organisation accord. In recent speeches Obama has rightly identified trade as key to pulling the world out of recession.

U.S. Trade Representative Ron Kirk made positive noises on a visit to Geneva last week. He revealed nothing new but said Washington was committed to seeing the trade round launched in Doha in 2001 succeed and he did not want talks to start from scratch or throw away work already done.

He restated U.S. demands that major emerging economies — China, India, Brazil and South Africa — must open their markets more to American exports to achieve a deal. Without tangible benefits for business, it would be hard for Obama to push a WTO agreement through a trade-sceptical Democratic Senate.

The prospect of holding a decisive WTO ministerial before the summer break still seems remote. Before it is worth convening ministers, the United States, India and probably China must thrash out the complex dispute over ways to shield developing nations from a surge in agricultural imports.

This and the equally sensitive issue of cotton, where U.S. subsidies are a big obstacle, were the last two points to be resolved when last year’s WTO talks collapsed. Eighteen other areas had been provisionally settled.

With hindsight, it is extraordinary that the pro-trade Bush administration clinched an agreement on nuclear cooperation with India last year without linking it to a Doha accord. Obama has not set a date for concluding a U.S. trade policy review, but Washington should not squander the opportunity for an early understanding with a more market-friendly Indian government.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Could Italy’s cash-strapped Fiat, Europe’s sixth auto maker, build a workable alliance with Chrysler and Opel to become be a profitable global player? Or would it be a marriage of losers, doomed to fail?

Fiat CEO Sergio Marchionne has made clear that his interest in Opel, the European arm of ailing General Motors, is more than just a well-timed tactic to get better terms in the alliance he is negotiating with troubled U.S. number three Chrysler. Chrysler faces likely bankruptcy if a deal is not clinched by April 30.

The troubleshooter who turned around the Italian group seems to want both deals. “It is quite possible for Fiat to engage in both of those transactions and to execute them properly,” he said on Thursday. Marchionne sees a wave of consolidation coming in the automobile sector and is determined to gain critical mass to survive. But his strategy looks over-ambitious.

Fiat has little cash and 4.8 billion euros in debt to repay this year, so Marchionne needs deals that cost little or nothing. That means he has to target companies in a weaker position than his.

Fiat would not take on any of Chrysler’s debts, and GM seems willing to give away a 51 percent stake in Opel free to anyone who will invest in it as a going concern, with the U.S. auto maker keeping a minority holding. GM needs Opel’s technology to produce the smaller, greener cars which are the condition for a U.S. government lifeline.

But even if the financials were to add up, which is a big “if”, the challenge for Fiat of turning such an alliance into a viable, profitable group looks daunting.

Germany’s richer, fitter Daimler bought Chrysler in better times and failed to turn the Detroit dinosaur around despite sending in its best managers and engineers, which also had the effect of causing Mercedes’ quality to decline at home.

Marchionne has made clear Fiat would need German state aid to restructure Opel. Since the two firms have lots of overlap in small and mid-range cars, it would have to close plants and lay off thousands of workers, with pain in both Germany and Italy. But Berlin would want guarantees on jobs and production sites in return for its aid, crimping Fiat’s room to make synergies.

Making all this work is a tall order, even for a turnaround maestro like Marchionne, and could be a dangerous distraction from Fiat’s own recovery, as Daimler found with Chrysler. Fiat’s controlling Agnelli family, which brought him in in 2004 to rescue Fiat, should be having an anxiety attack at his strategy.

(Editing David Evans)

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

PARIS, April 20 (Reuters) - The European Union’s antitrust czar is struggling to stop governments bending EU rules on state aid to business when they rescue banks with taxpayers’ money.

But Neelie Kroes’ threat to force some banks to the wall unless they offer viable restructuring plans within six months of receiving state cash was economically unwise and politically inept. It could fuel political pressure to suspend the rules and weaken the European Commission’s crucial watchdog powers.

EU regulators in charge of policing state aid have given fast-track approval to more than 50 rescue schemes since last October, when the full force of the financial crisis hit Europe after the collapse of Lehman Brothers in the United States.

Kroes told Reuters in an April 7 interview that time was running out for some banks to propose restructuring plans that in most cases would mean slimming down and selling off assets to avoid distortions in competition.
“Brussels will not rubber-stamp such schemes and may even let banks go bankrupt if those plans do not satisfy the Commission,” the EU Competition Commissioner said.
She is very unlikely to make good on her threat because of the depth of the crisis and fierce political pressure from big member states to go easy on the banks.
Brussels would do better to give banks and governments more time to get over the worst of the crisis before restructuring or repaying aid, rather than making banks divest now at fire-sale prices that would cause bigger losses for taxpayers.

Kroes implicitly acknowledged as much on April 15 when she approved a request from Britain to extend recapitalisation and credit guarantees for its banking sector, approved last October.

A Commission statement said “the circumstances on the financial markets justify the extension which aims at underpinning lending to the UK real economy”.

The EU watchdog has bared its teeth at some other state rescues resulting from the crisis. Kroes has had a tug-of-war with Berlin over the conditions for state rescues of Commerzbank <CBKG.DE>, Germany’s second largest bank, and regional lenders WestLB [WDLG.UL] and BayernLB [BAYLB.UL].

Brussels is demanding Commerzbank spin off mortgage lending in return for an 18 billion euro government bailout. It is also insisting on deadlines for the sale of all or parts of WestLB in return for last year’s rescue and pressing state-aided BayernLB to sell foreign units.

German Finance Minister Peer Steinbrueck has charged that EU foot-dragging is undermining confidence in a systemically critical part of the financial sector.

Kroes may have issued her warning to rebut such pressure and concentrate member states’ minds on the need for an exit strategy from bankrolling banks. Commission figures show EU governments have provided 3 trillion euros in guarantees, risk shields and recapitalisation since the crisis began.

But it makes no sense for the EU executive to force the break-up of banks in the midst of the worst recession since the Great Depression. It would force banks to take further losses by disposing of assets at a time when there was no market for them.

The Commission’s authority over state aid is not comparable with its direct power to veto mergers. It can order governments to recover aid deemed illegal and haul them before the European Court of Justice if they fail to comply, but that process often takes years.

If pressed by Kroes, governments would probably tough it out and hope that by the time the Commission acted, the market would have recovered sufficiently for the banks to repay them — or for the state to sell on shares it has purchased.

Politically, it would be dangerous for Brussels to start down that road against any of the big EU states, especially at a time when Commission President Jose Manuel Barroso is seeking re-appointment this year. French President Nicolas Sarkozy may be the most outspoken in his criticism of EU competition “dogma”, but many other governments have been irritated by the Commission forcing them to change national rescue measures.

Many of the bank rescues were approved under an EU treaty article that allows state aid “to remedy a serious disturbance in the economy of a Member State”. That emergency situation is unlikely to end in the near future.

If Kroes did decide to make an example of a bank, the risk is that member states could reach for the nuclear option and seek to suspend the state aid regulations completely in the financial sector, or use their power to override a Commission decision unanimously. So if the Commission overplays its hand it risks seeing its key economic powers emasculated.
(editing by David Evans)

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Basking in adulation across Europe, U.S. President Barack Obama chose to expend some of his political capital to urge the European Union to open its doors to Turkey.

This public reaffirmation of long-standing U.S. policy fits in with Obama’s attempt to restore the United States’ standing in the Muslim world, using Turkey as a platform for his first state visit to a Muslim country. It also helps rebuild strategic ties with Ankara that sank to a low ebb under George W. Bush, when Turkey refused to allow U.S. forces to use its territory and airspace to invade Iraq.

And it contributed to convincing Turkish leaders at the weekend to drop their opposition to appointing the Danish prime minister as the new head of NATO.

But it risks raising unrealistic expectations that may cause deeper disenchantment between Turks and Europeans if the EU accession negotiations remain in a slow lane to nowhere.

Obama’s call drew an instant brush-off from French President Nicolas Sarkozy and German Chancellor Angela Merkel. Sarkozy said it was up to EU members to decide who joins and that “the immense majority” of EU states opposed full Turkish membership. Merkel said there were obviously “differences of opinion.”

SECOND THOUGHTS

Although EU countries agreed unanimously in 2004 to start talks with Ankara with the goal of membership, some have since had second thoughts, due to hostile public opinion. France and Austria have made eventual accession subject to a referendum in their countries, raising the bar.

The talks have been hobbled by the Cyprus dispute, which led to the freezing of 8 of the 35 negotiating chapters, and by Sarkozy’s refusal to permit negotiation on policy areas that assume Turkish membership, putting another 5 off limits.

The main reason Obama cited for the EU to embrace Turkey — building ties with Muslims — is not the strongest selling point in Europe. Turkey’s qualifications include being a secular, democratic state with a vibrant market economy, a longstanding member of NATO and the Council of Europe and a strategically positioned energy hub.

His argument that Turkey has to be anchored firmly in Europe implies that it might otherwise drift off into Middle Eastern violence and religious intolerance, hardly a mark of confidence.

Turkey deserves EU membership if it meets the same criteria as all other candidates. These involve freedom of expression and the rule of law, as well as the capacity to adopt and implement more than 80,000 pages of European laws and regulations.

They require fundamental changes in the state established by Kemal Ataturk in 1923 that face resistance from nationalist elites in the army, the judiciary and the bureaucracy.

But Obama is right to warn Europeans they would do lasting harm if they are perceived to discriminate against Turkey because it is a Muslim country.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Thursday’s G20 summit may not mark the end or even the beginning of the end of the global recession. It did mark the end of the ascendancy of the unfettered, Anglo-Saxon model of capitalism.

What comes next is far from sure, but it will be different from the headlong dash for individual enrichment, short-term profit and financial acrobatics that began with the dominance of U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher in the 1980s. The widespread acceptance of increased regulation would have been anathema for U.S. President Barack Obama’s predecessors.

“The old Washington consensus is over,” British Prime Minister Gordon Brown declared after chairing the London summit. It was a clear acknowledgement that the deregulation that allowed casino capitalism to flourish on Wall Street and in the City of London, the world’s two biggest financial centers, had failed and will be fundamentally overhauled.

Brown’s role in brokering a bigger-than-expected G20 deal on refinancing and reforming the International Monetary Fund and World Bank, extending the scope of regulation and providing new finance for trade and the poorest countries was a personal success. But it may not help him much at home, where many recall his 1997-2007 decade as a “light-touch” finance minister who claimed to have ended the cycle of “boom and bust.”

The $1.1 trillion in funds for the IMF, the World Bank, trade finance and development which he announced, even if it is not all new money, may begin to restore market confidence that countries will not default, and to revive trade flows.

But Brown and Obama did not achieve their initial declared objective of persuading countries with balance of payments surpluses such as Germany and China to give a bigger fiscal stimulus to the world economy.

Nor did they come up with a solution for disposing of banks’ toxic assets, which continue to impede a recovery.

Indeed, they were upstaged by French President Nicolas Sarkozy and German Chancellor Angela Merkel, who appeared in lockstep on the summit’s eve to hammer home demands for tougher regulation of all markets and financial institutions, and for the naming of shaming of tax havens.

“We have taken an important step toward creating order in an area of the world where there was previously no order,” Merkel told a news conference. Sarkozy said the world had turned the page on “the Anglo-Saxon model.”

The Franco-German couple, so strained since the hyperactive Sarkozy’s election in 2007, achieved almost all its objectives. The French leader’s pre-summit theatrics of threatening to leave an empty chair may have been an empty threat, but it played well back home and may have put his host on the defensive.

Obama, who was more of a listener than a leader at his first global summit, made clear that while he believed in the free market, executive pay and rewards would have to be changed to encourage long-term performance instead of quick profits.

Other winners at the table included Chinese President Hu Jintao, who was courted by Obama and Sarkozy and magnanimously contributed $40 billion toward the IMF war chest to help countries in financial trouble. In return, Hu was promised a reform of IMF seats and votes in 2011 that will give his emerging economic colossus, which now has no more say than Belgium or Switzerland, far greater power.

That redistribution will also benefit India, Brazil, Mexico and Indonesia, and should reduce the traditional U.S. and European dominance over international financial institutions, symbolized by their carve-up of the top jobs.

Agreement to publish a list of tax havens that use banking secrecy to deny cooperation with other countries about suspected tax cheats and money launderers came only after countries such as China and Brazil had been assuaged about the fact that it was compiled by the Organization for Economic Cooperation and Development, a largely Western, rich countries’ body.

Russian President Dimitry Medvedev was also among the winners, enjoying a fresh start in relations with the United States despite his country’s continued military presence in breakaway regions of Georgia following last year’s war.

— Paul Taylor is a Reuters columnist. The opinions expressed are his own –

A year ago, mere mention of the notion of a multipolar world was a sure way to lose friends and dinner invitations in Washington.

The London G20 summit shows just how far power has ebbed from the United States, and from the West in general. Until late 2008, the Group of Eight mostly Western industrialized nations — the United States, Canada, Germany, France, Britain, Italy, Russia and Japan — was the key forum for economic governance.

The new, unwieldy top table has emerged faster than anyone dared predict because a humbled America and a chastened Europe need the money and cooperation of rising powers such as China, India, Russia, Brazil and Saudi Arabia to fix the world economy.

The United States remains the pre-eminent military and economic power, and how it manages to clean up its banking system will be the biggest factor in the length and severity of the crisis. But how the emerging countries manage their currency reserves, exchange rates, trade policies and energy exports will also determine whether we recover from recession in the next 18 months or slide into a depression.

U.S. President Barack Obama, on his maiden foray in global diplomacy, showed he understands the new dispensation by paying respects in prior bilateral meetings to Chinese President Hu Jintao and Russian President Dmitry Medvedev.

The Europeans acted as midwives to this new world (dis)order, but they have yet to accept that they too need to be cut down to size. To make way for the legitimate aspirations of emerging and developing nations in international financial institutions, the number of Europeans at the table will have to shrink. This should force them to pool their representation under the European Union, as they do in trade negotiations.

That may be unpalatable not just for Britain but even for core euro zone members such as Germany and France.

Yet French President Nicolas Sarkozy and German Chancellor Angela Merkel made the best case for a single EU seat by working like a tag team to pressure the United States and Britain into stricter regulation, notably of hedge funds, and tougher action against tax havens.

Managing the new power constellation won’t be easy and may not work. It will take trade-offs between Washington and New Delhi to clear the path for a global trade pact, among Western nations, China and India to fight climate change, and between industrialized and developing powers to reallocate power in the IMF, the World Bank and the United Nations.

At least now almost all the key players are at the table, except for Iran. But that’s another story.