President Obama urges G-20 nations to spend; they pledge to halve deficits
Monday, June 28, 2010
TORONTO -- President Obama warned Sunday that the world economic recovery remains "fragile" and urged continued spending to support growth, an expansionist call at the end of a summit marked by an agreement among developed nations to halve their annual deficits within three years.
The president's remarks tempered the Group of 20's headline achievement at the summit, a deficit-reduction target that had been pushed by Canadian Prime Minister Stephen Harper, the host of the meeting and a fiscal conservative. Although there is broad agreement that government debt in the developed world needs to be reduced, there is concern that cutting too fast and too deeply will slow growth and possibly spark a new recession.
In a news conference at the meeting's conclusion, Obama said that the world's largest economic powers had agreed on the need for "continued growth in the short term and fiscal sustainability in the medium term."
"A number of our European partners are making difficult decisions," Obama said. "But we must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today."
The group's closing statement included the specific deficit-reduction target, but it was couched in caveats -- that deficit reduction needed to be "calibrated" to avoid harming growth, paced differently in each country and paired with other reforms to strengthen the economy.
Obama and European leaders, in particular, came to the meeting with sharply different views of the strength of the global economic recovery, with the U.S. president more pessimistic. The declaration, in the works for weeks, gave each side what it wanted, although the specific deadlines went further than the Obama administration had preferred before the meeting.
The administration accepted the deadlines in order to avoid standing against Harper and such important economic powers as Germany. In his closing remarks, Obama stressed that "every country will chart its own unique course, but make no mistake -- we're moving in the same direction."
The International Monetary Fund's managing director, Dominique Strauss-Kahn, called the deficit target an "oversimplification" of the problem; he said it was more important for individual countries to craft the right economic policies to sustain growth, not blindly cut for the sake of meeting a goal.
Along with pledging to cut their annual budget deficits by 2013, the developed countries committed to stabilizing their overall debt by 2016. Obama recently set similar goals for the United States.
Despite the seeming division between the United States' deficit-reduction target and the slower approach favored by Canada and Germany, Obama said there was "violent agreement" within the group about the need to find proper balance -- with some highly indebted countries such as Greece needing to cut immediately and others supporting the recovery with higher spending.
Overall, the group's final statement reflects its consensus theory for how the world economy needs to change, with the heavily indebted Western nations steadily taming government deficits, and surplus-rich nations "rebalancing" to boost local spending and demand.
Strong emerging markets such as China, the document said, need to guard against a slowdown by encouraging their governments and people to spend more, investing more on infrastructure, establishing better social safety nets to give families more income, and allowing exchange rates to fluctuate more freely -- a quiet reference to China's managed currency policies. China is a member of the G-20.
"Advanced surplus" countries -- developed nations that run large trade surpluses -- committed to try to narrow the gap between imports and exports, a particular concern in Europe, where Germany's powerful export-led economy is blamed by some for economic weakness in Greece and elsewhere.
But the G-20 delegations also left Toronto with much of the heavy lifting on new global financial rules still ahead of them.
Discussion of a global bank tax -- once considered a major issue for the group -- ended with a commitment that the financial sector would make a "fair" contribution to the cost of resolving financial crises, but leaving it to each nation to decide how and when the contribution would be collected.
The group also committed to requiring banks worldwide to hold a "significantly higher" amount of capital to buffer them against financial shock. But acknowledging the difficulty that will pose to some institutions, the group's statement opened the door for a transition period to give weaker companies time to raise the funds.
The G-20 hopes by the end of this year to have new capital rules for banks in place, and leaders consider the issue a core element of global financial reform. But an early test of proposed bank capital rules found that they risked undermining economic growth. Even banks in relatively healthy systems, such as Canada, would have been in a bind and forced to raise substantial new funds, according to bankers and officials familiar with the matter.
"We have the confluence of two forces. One is about making sure there are no more crises, but we have to make sure we don't destroy our domestic banking systems," said Hyun Song Shin, senior economic adviser to the South Korean government. "What you don't want to do is strangle bank lending."