G20: Fiscal challenges may threaten recovery

WASHINGTON: World leaders will warn this week against taking the global economic recovery for granted while also noting that the huge costs of stimulus can hurt long-term growth, a draft G20 document shows.

The Group of 20 (G20), which meets in Toronto this weekend, has won credit for preventing a global recession in 2008 from becoming a depression.

But as the economy recovers, G20 unity is fraying.
The group must still forge consensus on controversial topics such as how quickly to shrink government deficits, how best to strengthen banks so that they can withstand any new downturn, and how to harmonise financial regulatory reforms.

»It’s a question of getting the balance right« BANK OF CANADA GOVERNOR MARK CARNEY

 

The draft version of the summit communique, obtained by Reuters and dated June 11, reflected divisions over which policy priority ought to take precedence — supporting still-shaky growth or shrinking budget deficits.

Bank of Canada governor Mark Carney said governments must plan for austerity but not rush to tighten belts all at once.

“It’s a question of getting the balance right,” Carney said in an interview with Reuters Insider.

“Nobody should be looking to balance their budget next year. Nor should anybody be in a position where they think there’s no need to start laying out a plan to stabilise their debt position, the United States included.”

Europe’s simmering debt troubles are a reminder that when markets lose faith in governments’ ability to rein in spending, borrowing costs soar and countries are forced into swifter, harsher fiscal fixes.

While the economy looks healthier than it did when G20 leaders met in Pittsburgh in September last year, there are signs that the recovery may have hit a plateau.

Unemployment remains high in the US and Europe, the US housing market at the centre of the financial crisis is weak, and a gauge of European services activity cooled more than expected in June.

The G20 draft said the recovery was “uneven and fragile” and warned: “There is no room for complacency.”
At the same time, it said “fiscal challenges in many states are creating market volatility, and could seriously threaten the recovery and weaken prospects for long-term growth.”

The US has warned against withdrawing supports too soon, mindful of when the government slammed the brakes on spending in the 1930s, prolonging the Great Depression.

“We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth,” US Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers wrote in the Wall Street Journal.

European countries, led by Germany, argue that fiscal restraint breeds confidence which in turn sustains growth.

An EU diplomat said fiscal targets proposed by Canada were too modest and some rich G20 countries should do more. — Reuters