By Daniel Flynn and Marc Jones
PARIS (Reuters) - Top financial policymakers said on Friday economic imbalances could worsen without a collective G20 effort to tackle them, but they conceded that key problems such as exchange rate mismatches would take time to sort out.
The warning came from policymakers from both sides of the Atlantic, some of whom repeated a wish to see China's currency rise and trade more freely.
"A cooperative spirit among policymakers is essential to ensure prosperity of the global economy," Janet Yellen, vice chair of the U.S. Federal Reserve's board of governors, told a meeting of U.S. euro zone and Asian policymakers in Paris.
"For countries with undervalued currencies, the adoption of more flexible exchange rates requires an internal shift in resources across sectors -- a transition that takes time."
Axel Weber, soon to quit as head of Germany's Bundesbank, said IMF forecasts pointed to renewed divergences in current account positions and that the surge in oil prices since unrest broke out across North Africa would accelerate this.
European Central Bank Governing Council member Mario Draghi added that global mismatches would remain a problem for a long time to come while ECB President Jean-Claude Trichet delivered the same appeal as Yellen for more flexible currencies in emerging market countries -- a line that primarily targets China's managed exchange rates.
Imbalances between wealthy and emerging nations are proving one of the biggest headaches for policymakers striving to repair the world economy after the worst downturn since World War Two and reduce the risks of future shocks, a job which the G20 is now working on.
"Current account surpluses have returned or are currently returning to pre-crisis levels and I think this will be sped up by the fact that the recent hike in oil prices might accelerate," Germany's Weber said.
Draghi told the meeting: "These imbalances will stay with us for a long, long time.
"What we need then is to make sure that capital markets function to finance these imbalances ... because we know they are not exactly efficient, so we need rules, we need a resilient financial system."
Weber also said currencies in many emerging economies remained undervalued and urged the United States to save more to curb its reliance on foreign capital.
They were addressing a dozen global policymakers who joined academics and businessmen under the banner of France's Group of 20 presidency to discuss imbalances, regulation, inflation and other topics, two weeks after G20 finance ministers fixed a set of indicators to measure imbalances.
"We are not trying to find the perfect financial system," French Economy Minister Christine Lagarde said.
"We want better coordination of economic policies. We want to reduce the need to accumulate international reserves. We need to get to the roots of why emerging markets feel the need to accumulate reserves," she said.
"We need to work better on the financial safety net, we need to do a good job, they need to be easy to use and not associated with the IMF stigma."
The finance ministers of the world's major economies succeeded only in reaching a fudged accord last month on how to measure global imbalances after China prevented the use of exchange rates and currency reserves as indicators.
"The G20 is the only group that basically has legitimacy to own this process (of tackling imbalances) and drive forward and achieve results," Weber said.
"We have to start passing a judgment on what the disequilibrium is. We have to embark on mechanisms to deal with these current account problems and come up with a surveillance process to make sure countries that commit to certain processes at the national level see these policies through."
Olli Rehn, EU Commissioner for Economic and Monetary Affairs, said economic surveillance should be broadened within Europe to identify regional imbalances and competitive divergences.
REGULATION, INFLATION HOT TOPICS
Friday's gathering came a day after the ECB shocked markets by saying it could raise interest rates as soon as next month, heightening concerns about the implications for struggling euro zone countries as EU leaders strive to resolve the debt crisis.
ECB board member Lorenzo Bini Smaghi said the world had a tendency to systematically underestimate inflation and overestimate growth in developed economies.
"If we look at the past at the kind of forecast errors which have been done, and here I look at the IMF forecast errors ... we have systematically underestimated inflation and overestimated growth in advanced economies," he said.
China and other key emerging economies are resisting pressure from Washington and Europe to allow their currencies to appreciate more quickly.
Many of them point the finger squarely at the U.S. Federal Reserve's new round of money printing via a $600 billion bond purchase program as the root cause behind a wave of "hot money" inflows that risk destabilizing their economies.
China was represented on Friday by deputy central bank governor Hu Xiaolian, who said little.
"Under the current conventional monetary system, issuers of major reserve currencies need self discipline," the Chinese central banker said.
(Additional reporting by Leigh Thomas; Writing by Catherine Bremer; Editing by Susan Fenton)