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Thursday, June 3, 2010

G20 strives to cut deficits without killing growth

Disagreements over how quickly to reduce billowing budget deficits and restore balance to the global economy risk straining high-level Group of 20 talks starting today.A plunge in the euro and in global stock markets, triggered by fears that Greece's debt woes could spread to other euro zone countries, has added urgency to the meetings of G20 finance ministers and central bankers in this southern port city.With officials ruling out agreement in Busan on key financial and regulatory reforms, including a mooted global bank levy, the need to strike the right balance between trimming deficits and sustaining economic growth will take centre stage."That is a shared imperative. We all recognise it," US Treasury Secretary Timothy Geithner told reporters in Washington on Wednesday before leaving for South Korea."As the IMF says, we want those fiscal reforms to happen in a way that's growth-friendly," he added. "Some countries are in a very strong position. Some countries need to move much more quickly."Another G20 official put the need for coordinated fiscal tightening more graphically: the euro zone crisis had shown that some countries would have to withdraw stimulus earlier than expected, but not everyone should run to the other side of the boat at the same time said.Deputy ministers were holding preparatory talks on Thursday, a day ahead of the start of the main meeting, which is itself clearing the ground for a June 26-27 G20 summit in Toronto.The G20, the premier international economic policy coordination forum, brings together the world's systemically important rich economies and emerging markets. Together they account for 85 per cent of global output.

Anxious to soothe global markets, the group is expected to back the euro zone's deficit-cutting strategy, even though China and Brazil have expressed concern that the bloc has not acted more decisively.However, differences of emphasis, if not downright disagreement, on how fast to plug the hole in public finances are close to the surface within the euro zone itself.French Finance Minister Christine Lagarde brushed off concern in some G20 capitals that Germany is preparing fresh belt-tightening even though its deficit, while above 5 per cent of GDP, is modest by European standards.Speaking to reporters in Paris on Wednesday, Lagarde said removal of the economic stimulus that governments put in place to combat recession was all a matter of "fine-tuning".But she added: "We need to be careful to avoid brutal shifts."Fiscally conservative Germany, the largest euro zone economy, is considering raising value-added tax to the full rate of 19 per cent on certain items that now benefit from a lower rate of 7 per cent, according to sources in the coalition government."If you abolish tax breaks, some will say that's a tax increase. At the end of the day, it's about having a sensible and balanced policy," Finance Minister Wolfgang Schaeuble told the Bild am Sonntag paper last weekend.

Beyond fire-fighting on the deficit front, ministers will discuss the medium-term growth framework -- or how to iron out economic imbalances that were a root cause of the 2008-2009 global financial crisis.Here, the emerging-market members of the G20 are concerned that the onus for adjustment will fall unfairly on them, impinging on their sovereignty in the process.Brazilian Finance Minister Guido Mantega expressed this frustration, blaming a weak dollar and low US interest rates -- not an undervalued Chinese currency -- for many of the world's economic woes."I've noticed there's a strategy by the United States and advanced countries to increase exports and reduce their imbalances at the cost of emerging markets," Mantega told Reuters in Brasilia last month."We have to reach a compromise, otherwise the emerging markets will seek solutions to defend their interests that will clash with those of the Americans and Europeans," he said.Officials said that Canada, the current G20 president, hopes it can at least secure agreement in Toronto on the broad suite of policies needed to reduce global imbalances as the economy recovers.If all goes well, individual countries would then commit themselves to specific policies at the next G20 summit in Seoul in November.

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