G20 summit: Rifts in Toronto as US warns EU of double-dip recession risk

Saturday, June 26, 2010
By Paul Martin

Divisions add to financial market jitters, with David Cameron praised by Canadian counterpart for budget to slash deficit

Patrick Wintour and Larry Elliott in Toronto
Friday 25 June 2010

Signs of deep rifts at the G8 and G20 summits in Toronto over how quickly governments should cut deficits added to financial market jitters today, with the Americans warning of the dangers of a double dip recession if all countries started to rein back spending at once.

The leading European economies, especially Germany, are putting a new emphasis on cutting back government spending, and there is a possibility that a G20 communique, due to be released on Sunday , will set out an indicative timetable of how far and fast countries should retrench spending.

David Cameron, making his first appearance at a world summit and packing in a frantic round of bilaterals to start building personal relations, was praised by the summits’ host for his deficit slashing budget earlier this week.

The Canadian prime minister, Steve Harper, said that he welcomed Cameron’s responsible and difficult decisions, saying the British prime minister’s budget “had raised the very fiscal consolidation agenda that we are trying to steer the G20 towards”.

Canada wants the G20 to endorse the idea that national deficits should be halved by 2013.

Ahead of his first bilateral, as prime minister, with Barack Obama tomorrow, Cameron tried to avoid the appearance of lecturing other states on economic policy. The PM, who was also to lead a discussion on Afghanistan, said: “We cannot be there for another five years, having been there for effectively nine years altogether.” Aides insisted this did not represent a change in policy.

Discussing the economy, Cameron said: “What I want to achieve, above all, is to get the right outcome for the world economy, and that means those countries like our own with big budget deficits have to move faster. Other countries with surpluses can afford to do different things.”

He insisted that he was not at odds with Obama over whether the leading economies should retain the stimulus that helped to prevent the world tipping into a depression after the banking crisis. “The risk to us – which the Americans and others recognise – is not taking action,” Cameron said. “I think that the G8 will conclude that those countries with the worst problems need to accelerate their actions, which is what we have done.”

Obama said that he wanted to see the G20 recognise that the world economy was inextricably linked, and that the task was to promote growth.

But concern that the G20 is divided has driven world stocks down for four days in a row. American GDP figures were pulled downwards today, adding to fears that the economy is not recovering as fast as was hoped.

Angela Merkel, the German chancellor, and her allies have been out in the US, and financial media insisting that her plan to cut the German deficit by €80bn over four years will not stall growth. She warned that the sovereign debt crisis in Europe required urgent action.

Admitting that the discussions at the two Canadian summits would be controversial, Merkel insisted that deficit reductions needed to be in place now. She said: “I and the EU will argue this position. There are others who are not yet so convinced of this exit strategy.”

Germany’s finance minister, Wolfgang Schäuble, joined the media offensive in an article published in the Financial Times. “Governments should not become addicted to borrowing as a quick fix to stimulate demand,” he wrote. “Deficit spending cannot become a permanent state of affairs.”

The Germans are being supported by the European commission president, José Manuel Barroso, who said in Toronto: “There is no more room for deficit spending.” The president of the European central bank, Jean-Claude Trichet, also dismissed the idea that budget cuts could torpedo the fragile economic recovery that is taking hold. “The idea that austerity measures could trigger stagnation is incorrect,” Trichet told the Italian newspaper La Repubblica, describing the German budget plans as “good”.

The election of the Cameron government, supporting this new austerity mood inside the EU institutions, has decisively shifted the balance inside the G20 towards greater action to cut deficits. Gordon Brown’s departure from these summits, a big advocate of last year’s worldwide fiscal stimulus, has left the Americans increasingly isolated, even if some claim the US attitude to deficit reduction in detail is not vastly different to Europe’s.

Obama is warning Europe that the US cannot be expected to pick up all the slack, and that the “surplus countries” – often code for Germany and China – must find ways to stimulate growth.

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