Finance ministers from the world's 20 biggest developed and developing economies (G20) are likely to agree next week on a two-stage approach to tackling global economic imbalances, a European Union document showed.

Such imbalances, reflected in the current account balance, private and public savings, debt and capital flows, can trigger or augment crises, destabilizing the world economy. G20 leaders agreed in November to find a way to tackle them.

The first step would be to identify the imbalances using an agreed set of economic indicators and benchmark values.

The second step would be to analyze the causes of the imbalances and possibly make policy recommendations on how to deal with them.

The two-step approach has been agreed on by G20 deputy finance ministers who met in Paris for a preparatory meeting on January 14-15, the EU terms-of-reference document for EU G20 delegations to the Paris meeting on Feb 18-19 showed.

The EU strongly supports the agreement reached by the deputies, said the document, obtained by Reuters.

The two-step approach will add structure and focus to the work of the G20.

There is no agreement yet in the G20 on the full set of indicators to be used for the assessment of imbalances -- this is what G20 finance ministers are due to agree on in Paris.

The document said that the European Union would push for the following set:

- current account balance

- public deficit and debt

- private debt

- savings ratio

- net foreign asset position

- reserve adequacy

- real effective exchange rate

The current account balance, rather than the trade balance should be a leading indicator as it provides a more complete and accurate picture of external sustainability, said the EU terms-of-reference document in an apparent reference to China, which a G20 source said preferred the trade balance measure.

A G20 source said that while the Paris meeting is likely to agree on which indicators to include in the assessments, their values, which would trigger a more in-depth analysis, would be decided in April at a G20 meeting in Washington.

INTERNATIONAL MONETARY SYSTEM

The G20 finance ministers will also discuss in Paris a reform of the international monetary system, including capital flows, international reserve assets and financial safety nets.

Investment flows can help poorer countries develop and grow, but they have been blamed for overheating economies and driving up inflation. They can also become a destabilizing force when investors suddenly withdraw money.

Over the past year fast-growing emerging markets such as Brazil have been the biggest recipients of these capital flows, and some nations have taken steps, such as raising taxes, to try to manage the influx.

The EU believes in the benefits of the free movement of capital ... and sees with some concern the increasing use of temporary controls, the EU terms-of-reference document said.

The EU sees temporary controls of capital inflows as a second best policy instrument to address volatile capital flows compared with macroeconomic macro-prudential and structural measures, the document said.

It added that the International Monetary Fund should identify what drove capital flows and what the appropriate domestic responses were as well as monitor global capital flows.

SDR ROLE

France, which took over the presidency of the G20 in November, is sounding out governments on ways to reform a monetary system dominated for decades by the U.S. dollar, with the aim of creating greater global stability.

French officials have said they hope to encourage greater use of the Chinese yuan as a reserve currency during their G20 presidency, including talks on a possible timetable for its inclusion in the basket of currencies which underpin the International Monetary Fund's Special Drawing Rights.

Other ideas include encouraging a greater role for the SDR itself as a reserve currency in an effort to move away from dollar hegemony.

The EU document indicated the 27-nation bloc was ready to consider the eventual inclusion of China's renminbi currency in the basket of currencies underpinning the SDR.

The EU was also ready to discuss SDR-denominated bonds, it said, inviting the IMF to explore ways to develop a private market for SDRs.

The EU is also open to discuss the possible costs and benefits of SDR exchange rate pegs and SDR-denominated debt as a possible way to reduce balance sheet risks, it said.

(Editing by Greg Mahlich)

China G20