Global recovery and a return to fiscal discipline were top of the agenda, writes JAMIE SMYTHin L'Aquila
LEADERS OF the G8 group of leading economies gathered in Italy yesterday with the ongoing economic and financial crisis top of their priority list.
They all agree that while there are tentative signs of stabilisation and possible recovery, the situation is “uncertain and significant risks remain to the economic and financial stability”. But there is little agreement on the best way to meet the challenges posed by fast-rising unemployment and a fragile banking sector still unwilling to lend cash to businesses.
German chancellor Angela Merkel and Swedish prime minister Fredrik Reinfeldt, whose country holds the EU presidency, both urged the world’s leading powers to set a path towards a return to fiscal discipline.
Alarmed at ballooning budget deficits and rising debt among G8 states, they want governments to prepare “exit strategies” from stimulus packages that have pumped billions of euro into economies to try to get them moving again.
Germany, traditionally the cheerleader for fiscal discipline due to its unhappy historical experience with hyperinflation in the 1920s, is forecasting a budget deficit of 6 per cent of gross domestic product in 2010. This is twice the limit set by the EU treaties and is causing alarm in Berlin, which fears extra government spending could destablise the euro currency.
Canada, which is not suffering as steep a downturn as the US or Europe, is also promoting a more conservative line when it comes to spending more cash. “My own thought is before there’s talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that’s been announced actually gets delivered,” said Canadian prime minister Stephen Harper as he arrived for the summit in L’Aquila yesterday. “That’s been our focus in Canada and I would encourage the same priority elsewhere.” But the US, Japan, France and Britain successfully resisted any attempt to tie their hands over additional stimulus packages at the G8 summit, arguing it is not yet clear if an economic recovery is certain.
“We will take, individually and collectively, the necessary steps to return the global economy to a strong, stable and sustainable growth path, including continuing to provide macroeconomic stimulus,” said the G8 communiqué. The statement also talked about the need to prepare “exit strategies”, but said cutbacks in spending could wait until the economic recovery is assured.
The big fear in the US, Britain, France and Japan – countries hit particularly hard by the current economic crisis – is that cutting back on state spending now to curb the growing deficits could choke off a fragile recovery. “We cannot afford to have low growth rates over many years,” said French president Nicolas Sarkozy at a bilateral meeting with British prime minister Gordon Brown in Evian, in France, prior to the G8 summit earlier this week.
There are strong political reasons for the US, Britain, France and Japan not to rule out any further stimulus packages. Brown faces a difficult general election next year and has little room to manoeuvre when it comes to cutting back spending on public services. Sarkozy is trying to overturn low approval ratings, and Obama cannot let the US slip back into recession.
Obama yesterday emphasised the need for China to do more to help global economic growth by opening its markets to foreign goods and stimulating domestic demand among its more than one billion inhabitants. This reflects the reality that the US will not be able to be the engine of world growth in the medium term because of its budget deficit and debt levels.
The G8 leaders also added some much-needed momentum to world trade talks, which have been stalled since last year. Today’s meeting between G8 leaders and the five biggest developing states – China, Brazil, India, South Africa and Mexico – is expected to set a time frame for the World Trade Organisation ’s Doha development round in 2010 and ask trade ministers to re-engage in September.
“The prospects look good because of the renewed engagement from India and the US, although there are hurdles to overcome,” said a senior EU official. With the world still struggling to shake off recession, at G8 level there is political support to at least try again.