Jun 2010 Financial News

G20 leaders facing worries about rising deficits

Jun 25, 2010

World leaders who addressed a severe economic crisis with an unprecedented show of strength last year are finding it harder to maintain their solidarity in the face of new challenges.

Despite US appeals to refrain from removing stimulus measures too quickly, country after country is rushing to slash spending and raise taxes to avoid suffering the same fate as Greece, which found itself on the brink of bankruptcy last month.

After maintaining remarkable unity at three previous summits, the leaders of the world's major economies will come to Canada facing a good deal of tension over the best approaches to take to make sure that the global economy continues to emerge from the worst recession in decades.

In addition to a split over stimulus spending versus deficit reduction, the leaders will also be facing differences over the best approach to take to overhauling regulation of the financial system, to make sure that the banking meltdown that precipitated the global crisis in the fall of 2008 is not repeated.

Many of those issues are unlikely to be resolved.

The discussions will start Friday among the Group of Eight - the world's wealthiest nations, plus Russia - at a lake resort north of Toronto. They will then expand into discussions among the G20, which includes the wealthiest countries plus major emerging economies such as China, Brazil and India, on Saturday and Sunday in Toronto.

Senior White House officials said Wednesday that the G8 talks would centre on development issues, including support for maternal and child health care in poor nations. The officials said US President Barack Obama and the other G8 leaders would also focus on a range of foreign-policy issues, such as escalating tensions between North and South Korea, Iran's nuclear programme and the stalled Middle East peace process.

While the global economy is beginning to grow again, high unemployment and a European debt crisis this spring have served as reminders that the recovery remains fragile.

Seeing the crisis that enveloped Greece, other nations have grown concerned about their high debt levels and have been rushing to put into place deficit-reduction programmes.

The new Conservative govern-ment of British Prime Minister David Cameron announced an emergency budget Tuesday that includes the toughest cuts in public spending in decades and an array of tax increases.

Britain's budget cuts and tax increases followed similar deficit-cutting plans announced in recent days by Germany, France and Japan.

Those cuts have raised worries in the United States that the world could be in danger of making the same mistakes leaders made in the 1930s, when they withdrew government support too soon and prolonged the Great Depression.

Treasury Secretary Timothy Geithner and Lawrence Summers, head of the US president's National Economic Council, emphasized Wednesday that "without growth now, deficits will rise further and undermine future growth".

But other countries have been urging greater fiscal discipline, saying a possible market meltdown - if the Greek debt crisis spreads - presents a bigger threat to the global economy at the moment.

Canadian Prime Minister Stephen Harper, the host for the weekend talks, sent his own letter last week calling on the G20 countries to set ambitious goals to cut their budget deficits in half by 2013.

Harper said that, while countries had to be careful to support near-term growth, it was also important to produce credible deficit-cutting plans "to dispel the uncertainty and financial volatility that can impair our future growth prospects."

"A lot of countries are looking at what happened to Greece and saying it could happen to us, too," said David Wyss, chief economist at Standard & Poor's in New York.

"The Europeans are much more worried now about debt and they are cutting back on stimulus spending."

No great differences

Administration officials insist the differences between Obama and the other G20 nations are not that great. They say Obama sees the need to set deficit-reduction goals, but believes it would be wrong to implement those pro-grammes this year with unemployment still painfully high.

Many private economists agree, arguing that while the United States and other nations have returned to growth, those gains have not been enough to put much of a dent in unemployment.

"The global economy is still very fragile," said Mark Zandi, chief economist at Moody's Analytics. "Countries have to balance the need for continued support now, while also putting together credible deficit-cutting plans that can be implemented down the road."

Even before the talks began, the United States scored two victories with a move by European govern-ments to shore up confidence in their banks by implementing a series of stress tests and an announcement by China that it will allow its currency to appreciate in value against the dollar.

In China, President Hu Jintao's government began Monday to allow its currency to rise in value against the dollar after having fixed the yuan-dollar exchange rate for the past two years.

A more flexible yuan was seen as a critical development by the administration to fulfil one of the G20 pledges to address dangerous imbalances, such as China's massive trade surpluses and the United States' huge trade and budget deficits.

- AP


Source:
Jamaica Gleaner
Friday June 25, 2010

http://jamaica-gleaner.com/gleaner/20100625/business/business92.html