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

He wasn’t present and he isn’t even in office yet, but Barack Obama was the elephant in the room at last week’s European Union summit on economic recovery and climate change.

The 27 EU leaders knew they needed strong agreements to reduce greenhouse gas emissions and give their recession-hit economies a big fiscal stimulus to make themselves credible partners for the U.S. president-elect.

Europe’s green deal had to be bigger, bolder and more ambitious to avoid being dwarfed when Obama announces his own clean energy program at his inauguration next month.

After the EU agreed on rules to cut carbon dioxide emissions by 20 percent by 2020, draw 20 percent of its energy from renewable sources and reduce energy consumption by 20 percent, European Commission President Jose Manuel Barroso adapted Obama’s campaign slogan to drive home the point.

“Our message to our global partners is ‘yes, you can’,” he declared. “Yes, you can do what we are doing … especially to our American partners.”

“We are asking him (Obama) to join Europe and with us lead the world.”

French President Nicolas Sarkozy, climaxing an energetic six-month presidency of the EU, proclaimed: “No other continent in the world is setting itself such binding limits as the measures we have just adopted.”

Behind their hubris lay worries that the charismatic new U.S. president could grab the mantle of green leadership from Europe, even though the goals he has outlined so far are more modest — to stabilize U.S. carbon emissions by 2020.

“The risk is that the Europeans could be upstaged by Obama acting more radically than Europe,” says Antonio Missiroli of the European Policy Center think-tank.

There is also the perennial fear that Europe may not figure very high on the new American leader’s radar screen, and that he may care more about relations with Asia’s emerging economic powerhouses than with the slow but steady EU.

“For Obama’s agenda, Euorpe is neither very relevant nor an obstruction. It doesn’t tip the balance,” Missiroli said.

Sarkozy warned more reluctant EU leaders that Europe would make itself look ridiculous if it abandoned its green ambitions just when the United States had finally elected a president who made climate change his priority.

Brussels officials are talking enthusiastically of linking the European emissions trading scheme with a future U.S. system to lay the foundation for a global carbon market.

They may be in for a cold shower, given likely resistance in the U.S. Congress to any binding cuts in carbon emissions.

Indeed, EU and U.S. officials are pessimistic about the chances of an international agreement in December 2009 at United Nations talks on a climate pact to replace the Kyoto Protocol, which Washington never ratified.

Some European leaders argued that the EU had to take the lead precisely because of the problems Obama will face at home.

“An EU agreement will support President Obama, who will have great difficulty getting an agreement on a system of emissions trading,” German Chancellor Angela Merkel told fellow leaders behind closed doors, according to an official record.

On the economy too, Barroso argued that Europe and the United States should coordinate their recovery programs.

Yet the main European powers remain divided on the correct response to the recession, despite agreeing on paper on a European Commission programme calling for a stimulus of about 1.5 percentage points of Gross Domestic Product.

Obama has indicated he is considering a far bigger fiscal jolt to the economy, given the scale of the U.S. recession.

Germany’s finance minister has branded Britain’s sweeping cut in sales tax “crass Keynesianism”. All other EU countries rejected any across-the-board cut in Value Added Tax.

France has focused its recovery measures on public infrastructure investment, plus a short-term cash incentive to trade in old cars for new ones.

Merkel has resisted pressure from Berlin’s EU partners to do more to stimulate Europe’s biggest economy, but she now faces domestic calls too for tax cuts and spending on public works.

On both climate change and the economy, Europe hopes to find a more cooperative partner in Obama, but perhaps with a degree of self-delusion about his interest in European solutions.

For previous columns by Paul Taylor, please click here.

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

European Union leaders this week face a crucial credibility test of their ambition to lead the world in fighting climate change, just as President-elect Barack Obama is making it a top priority for the United States.

Will the EU give real teeth to its pledge to cut greenhouse gas emissions by at least 20 percent by 2020, draw 20 percent of their energy from renewable sources and cut energy consumption by 20 percent over the same period, or will it fall short?

The omens for the Dec. 11-12 summit are not too encouraging.

Europe’s climate goals were agreed in March 2007 in sunnier economic days. The financial crisis and looming recession have fueled pressure from heavy industry and some governments to go easy on implementation measures.

The EU will almost certainly reach a deal by the early hours of Saturday, which French President Nicolas Sarkozy will no doubt declare a triumph for his presidency of the bloc.

Yet the draft legislation has already been watered down to assuage industrial lobbies led by Germany, and more concessions will have to be made to placate coal-dependent Poland.

European Commission President Jose Manuel Barroso says he is confident the essentials of the EU executive’s proposal to turn Europe’s climate objectives into reality will remain intact.

But green campaigners say the result will be a toothless package that falls far short of the EU’s leadership boast.

“The glass is three-quarters empty. The emperor is standing there with no clothes,” says Stephan Singer, head of the European Climate Change and Energy Unit at pressure group WWF.

FEAR OF COSTS

He and other environmentalists argue that the EU should be aiming to cut emissions by 30 percent in the light of impending “regime change” in the White House, Australia’s ratification of the Kyoto Protocol on climate change, and sigs of progress by China, India, Brazil, Indonesia and the Philippines.

Singer says the 27-nation EU will probably achieve its so-called 20-20-20 objectives, since European emissions are already almost 9 percent down on the 1990 starting point, leaving just 11 percent to cut in the next decade.

Moreover, EU states can make half those reductions far from home through a Clean Development Mechanism, which gives them carbon credits for funding emissions cuts in developing nations.

The emerging EU deal may not be tough enough to galvanize other nations into an agreement at U.N. climate negotiations in Copenhagen in December 2009 to save the planet from potentially catastrophic ecological consequences of global warming.

Fear of high initial costs for business and consumers has made many European governments wary of unilateral EU action, despite warnings from economists such as Britain’s Sir Nicholas Stern that the price of inaction will eventually be far higher.

Auto manufacturers have been given an additional three years till 2015 to meet a binding limit on carbon emissions from cars, and fines for non-compliance have been tapered in a way that may encourage some producers to overstep the mark.

INDUSTRIAL LOBBYING

The main climbdowns have been on the European Emissions Trading Scheme (ETS), which caps overall output of carbon dioxide, the main greenhouse gas, and makes companies buy and sell permits to emit CO2 according to their needs.

The Commission proposed requiring industry to buy all or most ETS allowances at auction from 2013. Power companies would have to buy 100 percent of their permits from the outset.

However, energy-intensive sectors such as steel, glass, chemicals, aluminum, ceramics and cement, which threatened to relocate outside Europe if forced to pay for pollution permits, will now be granted free allowances — at least initially — unless there is an international agreement.

The criteria proposed by the French presidency to determine which industries are exposed to international competition and are hence deemed unable to pass on auctioning costs to customers seem particularly generous to business.

This is a victory for German Chancellor Angela Merkel, whose green credentials have been tarnished by industrial lobbying since she presided over the 20-20-20 accord last year.

Merkel is determined not to jeopardize jobs in Germany, Europe’s biggest industrial economy, in an election year.

Exempting many companies from having to buy permits will reduce the incentive to use energy efficiently and shrink the proceeds from auctioning earmarked to fund clean energy projects in poorer EU states and developing countries.

Even electricity generators may now get some free carbon allowances in countries that are highly dependent on coal.

This is a sop to Poland and other central European states that are heavily reliant on coal and do not want to become more dependent on Russia by switching to less polluting gas.

PARTNER FOR OBAMA

A summit deal may hinge on Germany and Britain agreeing to earmark more EU money for next-generation clean coal power stations, cross-border electricity grid interconnectors and perhaps new nuclear plants for Poland and its Baltic neighbors.

On the plus side, European countries have made significant progress on legislation to promote renewable energy sources such as wind, wave, tidal and solar power.

And they are well set to reap big energy efficiency gains through better building design, insulation, lighting, heating and cooling.

So the EU’s green credibility may just about survive the inevitable compromises and delays necessary to get a deal at the Brussels summit, although environmental campaigners are bound to denounce a sell-out.

“In the end, we will achieve 80 to 90 percent of our objectives and the critics will scream about the other 10 or 20 percent,” sighed an EU official involved in the climate drive.

“But Obama will look at what Europe is doing and see he has a partner in the fight against climate change.”

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

The global financial crisis has been a stark reality check for the European Union, exposing divergences over economic policy and highlighting the European Commission’s growing difficulty in enforcing common rules.

The European response to the turmoil shows that most real power still resides with member states, not in Brussels. Even after 50 years of integration, governments instinctively reach for national solutions at the risk of harming EU partners.

The 27 EU leaders, especially the big three of Germany, France and Britain, need to take a deep breath before next week’s summit and measure how much damage they could inflict on future prosperity and on Europe’s credibility in the world if they continue down this path.

The EU united briefly in October behind a plan to avert a meltdown of the financial system and a call for a global summit to reform financial supervision, incorporating the emerging economies of Asia, Africa and Latin America.

But since then, forces pushing towards a re-nationalization of EU economic, fiscal and competition policy seem to have gained the upper hand over forces working to unite and coordinate Europe’s response to the crisis.

“It may be that measures taken nationally will break community rules and we will not recover,” said Tommaso Padoa-Schioppa, former Italian finance minister and president of the Notre Europe foundation.

“What we observe now is that both forces are at work — an extraordinary effort at coordination and a strong diversity of measures taken at national level.”

SMOKE AND MIRRORS

In two months, countries such as Ireland, Britain and now France, have cast aside the EU’s budget discipline rules in favor of massive deficit spending.

Who seriously believes that the deficits which those countries will run next year, way in excess of the EU’s limit of 3 percent of Gross Domestic Product, will be brought back into line within a year or two, as Brussels says it expects?

Likewise, the 200 billion euro ($252.8 billion) economic recovery program proposed by the executive European Commission last week was largely an exercise in smoke and mirrors, aimed at creating at least a facade of unity.

It totted up money already spent, or about to be spent, by national governments, with just 30 billion euros in proposed EU funds, some of which finance ministers blocked this week.

That may be inevitable since the EU budget is a mere 1 percent of the bloc’s combined GDP, while national budgets average about 40 percent of GDP.

The Commission hoisted a European flag of convenience over often divergent measures that member states were taking anyway, in the hope of dissuading them from making more unorthodox, protectionist or beggar-thy-neighbor moves.

But it cannot mask the fact that the three biggest EU economies are heading in separate directions.
Britain has thrown fiscal caution to the wind and cut sales taxes, France is on the brink of announcing a big boost in public spending but orthodox Germany, Europe’s biggest economy, is holding out against a bigger stimulus for now.

EACH FOR HIMSELF

EU restrictions on state aid to banks have been eased, with a further softening in the pipeline as Brussels faces pressure to be ever more indulgent. Even pro-market Sweden’s finance minister this week urged the Commission “to call off these legions of state aid bureaucrats”.

The single market at the heart of Europe’s economic success is starting to fray as a result.
“Each country is acting for itself, also in the impact of bank rescues,” said Daniel Gros, director of the Center for European Policy Studies.

“There are different conditions on help to the banks, different interest rates on state loans to banks, different governance arrangements, different conditions on lending.”

An earlier free-for-all over guaranteeing bank deposits led some savers to withdraw money from solvent institutions and place it in troubled ones such as Britain’s Northern Rock or Irish banks that had an unlimited state guarantee.

Now France is fighting Brussels to be allowed to pump money into healthy banks in return for commitments to lend more to the “real economy”, while the Commission demands that ailing banks reduce their activity as a condition for state aid.

EU officials are worried that the each-for-himself mentality will weaken the European position in global climate change negotiations, the latest round of which began this week.

EU leaders are due to adopt ambitious plans next week to make good on their pledge to cut greenhouse gas emissions by 20 percent by 2020, reduce energy consumption by 20 percent and draw 20 percent of energy from renewable sources.

But a fierce battle is under way to water down or delay implementing measures because of the financial crisis. That would weaken the EU’s green leadership ambition just as a more climate-conscious U.S. president takes office.

GOLF CART BLUES

Historically, European integration advances through crises. The 1970s oil price shock led to the creation of the European Monetary System. The 1989 fall of the Berlin Wall made possible the establishment of the euro single currency.

And the Sept. 11, 2001 attacks on the United States hastened the adoption of a European arrest warrant, replacing centuries of cumbersome extradition proceedings for criminal suspects.

The financial crisis may yet spur another leap forward for the EU, perhaps convincing Irish voters next year to reverse their rejection of the Lisbon Treaty and allow a reform of the bloc’s creaking institutions.

But this crisis could also deal Europe an enduring setback. If budget discipline and competition rules fray further, it will be hard to get the toothpaste back into the tube when it’s over.

One image from the last few weeks summed up the EU’s uncertain state as it struggles to find a common path.

At crisis talks in Camp David with U.S. President George W. Bush in late October, French President Nicolas Sarkozy, the rotating president of the EU member states, rode in the front of a golf cart with Bush, while European Commission President Jose Manuel Barroso sat glumly in the back, facing the wrong way.

Diplomats said Barroso was offered a seat in the second cart alongside Secretary of State Condoleezza Rice, but he was determined to stay in the front cart, even if that meant taking a back seat.

For more columns by Paul Taylor, click here.

Want to debate? Send in your written submissions to debate@thomsonreuters.com.

–Paul Taylor is a Reuters columnist, the views expressed are his own–

Anyone who expected the major emerging economies to write fat checks in exchange for being invited to the first G20 leaders’ summit on rescuing the world economy will have been disappointed.

But that should only have surprised the naive.

Despite intensive lobbying by British Prime Minister Gordon Brown of Saudi Arabia and China, the rising powers were never likely to make a cash down-payment to the International Monetary Fund before getting more seats and votes at the top table.

IMF Managing Director Dominique Strauss-Kahn said after Saturday’s Washington summit that his organization will need at least another $100 billion in the next six months to bail out countries stricken by the credit crisis.

Among the world’s major reserve holders, only Japan, an established member of the Group of Seven most industrialized nations, offered the IMF a $100 billion unilateral loan.

The Saudis, Chinese, Russians and Indians want to be sure of winning a permanent say as equal partners in the management of the global economy, and of locking incoming U.S. President Barack Obama into a new world financial order, before they open their wallets.

Even then, they face serious constraints due to domestic development priorities, nationalist public opinion and uncertain energy prices that will limit any contribution.

Here is some of their thinking:

SAUDI ARABIA - Saudi Finance Minister Ibrahim al-Assaf was most outspoken in explaining, in a Reuters interview, why the oil-rich kingdom was not about to pick up the bill for the financial crisis.

“We (Saudis) have been playing our role responsibly and we will continue to play our role responsibly but we are not going to finance the institutions just because we have large reserves. These reserves are for the development of the kingdom of Saudi Arabia,” he said.

Economists say Riyadh has taken a bigger hit from the crisis than it has publicly acknowledged. Its ambitious industrialization plans, as well as its largesse to domestic interest groups, may require a higher oil price than today’s.

Oil has tumbled from a record $147 a barrel in July to just $55 today, which is likely to prompt deeper production cuts. So producer nations face a double revenue hit on price and volume.

At this price, Saudi Arabia and all other Gulf Cooperation Council states except Kuwait can expect to post a fiscal deficit next year, according to economist Mushtaq Khan of Citigroup Global Markets.

Politically, it would be hard to justify helping bail out the widely hated West at a time when Saudi investors have seen their stock market plunge and their foreign investments tank.

The Saudi government may also wait to see whether Obama takes up a King Abdullah’s Arab League peace initiative with Israel and gives priority to Israeli-Palestinian and Israeli- Syrian peace, in contrast to outgoing President George W. Bush.

CHINA - Chinese President Hu Jintao made clear Beijing’s main contribution to stabilizing the world economy was a massive domestic investment program that should help cushion growth at a time when exports may shrink due to recession in the West.

The $586 billion two-year economic stimulus, much of it to be spent on modernizing the creaking infrastructure of the world’s most populous nation, was a bold move by the cautious standards of China’s collective leadership.

The Chinese, sitting on almost $2 trillion in foreign currency reserves, are waiting to see if Obama will share real power with emerging nations. They also want guarantees against protectionism by a Democratic administration and Congress.

“The question is whether developed countries are ready to accept China as a major player. If you want China to take out money when the crisis happens, but give China little power when voting, nobody is going to play with you,” a senior official in the country’s $200 billion wealth fund said.
Jin Liqun, supervisory board chairman of China Investment Corp. and a former vice finance minister, said industrialized powers “should address developing countries with humility”.

Although China is not a Western-style democracy, public opinion still matters.

Most media commentary has resolutely opposed any “bailout” of the West by succumbing to pressure to buy more U.S. Treasury bonds, Standard Chartered China analyst Stephen Green notes. But he said China could transfer some of its dollar reserves from U.S. Treasuries to IMF Special Drawing Rights, especially if it is given more voting rights in the IMF.

RUSSIA - Russian leaders have been dismissive of the IMF as a tool of U.S. dominance of the global economy. Although it still has $500 billion in reserves, Moscow is fast burning through its foreign currency pile as it tries to stabilize its own markets and bail out oligarchs in financial trouble.

A lower oil price also threatens future Russian state revenues and investment plans.
President Dmitry Medvedev and Prime Minister Vladimir Putin think in terms of power rather than economics.

Any Russian cash for the IMF would probably have to be part of a wider bargain with Obama covering missile defense, NATO enlargement, nuclear and conventional arms control, non-proliferation and perhaps Georgia and Kosovo as well.

The Russians don’t rule out such a deal but intend to talk with Obama from a position of strength. That is why they have blown hot and cold in the last two weeks, threatening to deploy missiles in Kaliningrad, on Poland’s border, but also voicing hopes of better ties with the new U.S. president.

INDIA - India, which still sees itself as a developing nation and has less IMF voting power than Belgium, is waiting to see whether Obama accepts a new distribution of world economic and political power before making commitments.

Finance Minister Palaniappan Chidambaram told a World Economic Forum event that the G20 had come to stay as the single most important forum to address global financial and economic issues, and much better than the G7.

But he said: “It is not clear to us whether the new (Obama) administration is fully on board with what the outgoing administration has put on the table.”

India too will be looking for guarantees against U.S. protectionism while demanding the right to protect its own millions of subsistence farmers.

All these countries say they are willing to become “responsible stakeholders” in a new world financial system. Just don’t expect them to pay up before they see the reality of power.

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

With Europe and the United States staring recession in the face, a growing chorus is calling for massive public investment in clean, green energy to revive economic growth while fighting climate change.

Under the slogan of a “Green New Deal”, leaders from U.N. Secretary-General Ban Ki-moon to former U.S. Vice-President Al Gore and German Foreign Minister Frank-Walter Steinmeier argue that industrialized countries can kill two birds with one stone and create millions of “green collar” jobs.

The idea of using tax breaks and extra public spending to promote energy efficiency, mitigate carbon emissions and develop renewable power sources, inspired by U.S. President Franklin D. Roosevelt’s New Deal public works program during the 1930s Great Depression, sounds like common sense.

But it may not happen fast enough, or on a sufficient scale, to stimulate the economy, arrest global warming or durably bring down oil prices that reached $147 a barrel earlier this year.

“This is the big opportunity to get off the oil hook, but governments have to be bold, do it on a large scale and stick to it,” said Tom Burke, co-founder of environmental consultancy E3G and an associate professor at Imperial College, London.

He advocates sustained public investment in wind farms, photovoltaic and solar energy, developing clean coal technology, connecting European electricity grids, and combining heating and power from gas to make offices and homes more fuel-efficient.

Yet governments which have collectively found about $5  trillion to rescue banks and galvanize economies are hesitant to focus fiscal stimulus measures on clean energy because of the long lead-time for many projects.

Indeed, there are signs that financial crisis is causing cutbacks in public and private-sector investment in wind farms, solar and wave power, and economic angst may make the European Union scale back ambitious legislation to fight climate change.

President-elect Barack Obama said in a campaign debate that the credit crunch could slow his plans for a $150 billion clean energy program, designed to reduce U.S. dependence on imported oil and create 5 million “green collar” jobs.

Research group New Energy Finance says new investment in clean power will decline by 4 percent this year compared with 2007 due to the crisis although the conditions for growth are intact. Total new investment in low carbon technology is estimated at $142 billion in 2008, down from a record $148 billion in 2007.

Germany, Europe’s biggest economy, earmarked just a fraction of this month’s 50 billion euro ($62.45 billion) stimulus package for measures to renovate buildings and reduce emissions.

Governments are tempted to give money directly to voters in tax cuts or one-off payments to trigger an immediate spurt in consumption rather than take the slower route of investing in green infrastructure schemes, economists say.

A recession is also a difficult time to introduce new green taxes that promote environmentally sustainable behavior.

Some governments have found ways to combine the two, but so far mostly on a modest scale.
Britain has spent public money on insulating old people’s homes. Lagging roofs and filling wall cavities cuts pensioners’ fuel bills, reduces energy consumption, curbs CO2 emissions and creates jobs. It’s a win-win-win-win proposition.

France has created tax incentives to buy low-emission cars, with corresponding tax hikes on gas guzzlers, that are changing driving habits and have prompted auto makers to advertise their vehicles’ green performance rather than acceleration or power.

To make an impact on gross domestic product next year, European countries would have to do far more, especially on energy efficiency, where environmentalists and EU officials say the biggest and quickest gains are to be made.

Achim Steiner, executive director of the U.N. Environment Program, says Britain could create thousands of jobs within two years by reducing the carbon footprint of buildings.

The European Commission’s Strategic Energy Review, published last week, offers plenty of longer-term projects awaiting funds.

They include a European gas and electricity supergrid, giant North Sea windfarms connected by underwater cables, pipelines across Turkey to central and southern Europe and a Mediterranean energy network to harness North African solar and gas potential.

There’s no shortage of work, but it takes political courage in a recession to think big.

– Paul Taylor is a Reuters columnist, the views expressed are his own –

LONDON (Reuters) - Move over America! Make space Europe! The world’s top leadership table is expanding to bring in emerging powers from Asia, Africa and Latin America to help rescue the global economy.

This week’s Washington summit of 20 nations, called to discuss reforming the international financial system and avert a further worsening of the credit crisis that began in the United States, sets a precedent for a new international order.

Emerging economies such as China, India, Brazil, South Africa and Mexico are invited to share responsibility for the economic fate of the planet with the established Group of Eight industrialized nations — the United States, Japan, Germany, Britain, France, Italy, Canada and Russia.

Saudi Arabia is urged to disgorge its petrodollars and China to tap its $1.9 trillion reserves to underwrite rescue packages and buttress a Western-dominated financial system the collapse of which would wreak even worse devastation around the world.

No longer mere appendages invited for lunch at the end of the annual G8 summit, the rising powers are in demand because they have either mountains of cash, vital natural resources, fast-growing economies or regional security responsibilities.

Will they cooperate, and what do they want in exchange?

“A voice is the most important thing,” said a former senior U.S. financial policymaker, who spoke on condition of anonymity.

“As they look out at global economic prospects, they will also want to see that their money is going to be safe. They will want to see a plan that gives them confidence,” he said.

Beyond that, some of the key holders of dollars and oil may seek security guarantees and assurances that the West will not discriminate against investments by their sovereign wealth funds or their exports during the coming recession.

In a joint statement, the so-called BRIC countries — Brazil, Russia, India and China — called last week for “reform of multilateral institutions in order that they reflect the structural changes in the world economy and the increasingly central role that emerging markets now play”. They also sought assurances against protectionism in the financial crisis.

INTERESTS AT STAKE

Here are some of the interests at stake for key players:

CHINA - The world’s most populous nation, a nuclear power and member of the U.N. Security Council, still regards itself as a developing country. Its communist rulers have just announced a huge domestic stimulus package of public investment but they are deeply cautious about opening up further to the world economy.

Chinese investment has not always been welcome in the United States, where many in Congress accuse Beijing of keeping its currency artificially cheap and want to curb imports from China.
Beijing has said nothing about its terms for helping bail out the capitalist West, but it is likely to want a bigger voice in global economic governance and some guarantees against protectionist steps by Washington and Brussels.

It may also want to ease Western pressure on it to curb greenhouse gas emissions in the fight against global warming.

INDIA - The world’s second most populous country has long sought a larger role in global leadership and sees itself as a spokesman for the developing world.

Prime Minister Manmohan Singh has called for reform of the United Nations Security Council and the G8, implicitly to give India a permanent seat in both.

“Our voice on how to manage this crisis in a way that does not jeopardize our development priorities needs to be heard in international councils,” he told a summit with fellow emerging powers Brazil and South Africa last month.

India seeks both assurances against Western protectionism and the right to continue protecting its subsistence farmers. It too wants to deflect Western pressure to curb emissions which it says would deny its right to economic development.

SAUDI ARABIA - The world’s biggest oil exporter is the only Middle Eastern state in the G20, frustrating Egypt, which lacks resources but sees itself as the leader of the Arab world.
Arab specialists say Riyadh seeks above all U.S. protection against Iran’s growing regional power and nuclear ambitions and from the ascendancy of Shi’ite Muslims in Iraq, which it fears will embolden Shi’ite minorities around the Gulf.

It also wants the next U.S. administration to take up an Arab League plan for peace with Israel and pressure the Jewish state to reach accommodations with Syria and the Palestinians and to stop discrimination against Arab investments, such as the blocking of Dubai Ports World’s purchase of six U.S. ports.

The Saudi monarchy also wants an end to what it regards as destabilizing U.S. pressure for democracy in the Middle East.

INCUMBENT POWERS UNEASY

The first-ever G20 leaders summit, for which the European Union has made all the running, comes in the lame-duck period when President George W. Bush is preparing to hand over to President- elect Barack Obama, putting Washington on the defensive.

“It is outrageous that the Europeans would take advantage of the moment of maximum U.S. weakness to call such a meeting,” the former U.S. financial policymaker said.

The G20 was created in 1999 but until now has been limited to broad-brush discussions among finance and monetary officials.

The world’s only superpower prefers bilateral financial diplomacy, in which it has the upper hand, and tried-and-tested smaller formats such as the G7 grouping of finance ministers and central bankers, which does not include Russia.

Washington is trying to deflect a battery of ideas from hyper-active French President Nicolas Sarkozy for supranational regulation or supervision of financial markets, hedge funds, private equity, mortgage lenders and sovereign wealth funds.

The EU has led pressure to expand the G8 to incorporate the emerging nations, whose cooperation the Europeans see as vital not only to help restore financial stability but also on issues such as trade liberalization and fighting climate change.

Despite anomalies in its make-up, such as the inclusion of Argentina, the G20 summit is well placed to become a key forum on financial reform because it already exists, and there are plans to hold a series of such meetings.

This might prove more practical than British Prime Minister Gordon Brown’s proposal for a sweeping review of the post-World War Two financial order, known as Bretton Woods.

But the G20 may be too unwieldy to be effective, and smaller leadership forums seem bound to emerge. One favorite is a G13 or G14 — a forum that would expand the G8 to include China, India, Brazil, Mexico and South Africa. Some see an Arab or Muslim member, either Egypt or Saudi Arabia, as essential.

Spain, Europe’s fifth largest economy and the world’s ninth but not a G20 member, announced at the weekend that it had won a last-minute invitation to the summit.

However many policymakers, both in the United States and in the developing world, see the over-representation of Europe at the world’s top tables as part of the problem.

The Europeans only reluctantly yielded a little of their voting powers to China in the International Monetary Fund this year. The big EU member states remain unwilling to pool their seats into a single EU delegation in global institutions, with the notable exception of the World Trade Organization.

But a further redistribution of European and U.S. votes at the IMF and some consolidation of Europe’s seats at the world’s top tables may be the price to pay for the emerging world’s help in resolving this financial crisis.

(Pictured above: Brazil’s Finance Minister Guido Mantega, South Africa’s Finance Minister Trevor Manuel (R) and British Treasury Financial Secretary Stephen Timms (L) attend a news conference in Sao Paulo November 9, 2008.)