Tags: G-20 | Austerity | Growth | US

G-20 Eases Austerity Push Amid Global Growth Worries

Monday, 05 November 2012 07:08 PM

The world’s finance chiefs diluted budget-cutting commitments out of concern that a rush of U.S.- led austerity would choke already fragile global growth.

Citing a weak economic expansion, Group of 20 finance ministers and central bankers ended talks in Mexico City vowing to ensure the “pace of fiscal consolidation is appropriate to support recovery.” Hours before its presidential election, the U.S. promised to “carefully calibrate” its pullback as $607 billion of automatic tax increases and spending cuts loom.

The growth-friendly pledges highlight a change in tone two years after the richest G-20 members signed up for fiscal consolidation. The new position reflects increased concern that government belt-tightening is harming, rather than helping, the investment and consumption needed to spur economic growth.

The statement “reflects how the consensus has become less austere,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York. “Previously, austerity was thought best, but markets don’t seem to believe that now and politicians are recognizing they have to be realistic over what can be achieved.”

Japan was still urged to restrain a debt totaling 237 percent of gross domestic product, while Europe was pressed not to delay on delivering new crisis-fighting policies such as a continent-wide bank supervisory system, according to the statement.

Modest Growth

Describing worldwide growth as modest and subject to “elevated” threats, the G-20 identified as risks possible delays in European rescue measures, the potential for sharp fiscal tightening in the U.S., a slowdown in some emerging markets and a political impasse over funding this year’s Japanese budget.

“The global economic context remains difficult and the fragile recovery remains at risk if the needed policy actions are not implemented,” International Monetary Fund Managing Director Christine Lagarde told reporters.

After uniting around stimulus to combat the 2009 global recession, the group of leading industrial and emerging markets splintered over whether continued aid or austerity paved the best route to prosperity. At a June 2010 summit in Toronto, eight of the G-20’s richest economies, aside from Japan, committed to cutting deficits in half by 2013 and stabilizing or reducing debt as a share of GDP by 2016.

Progress has since been mixed with the latest IMF estimates showing only South Korea, Canada and Australia largely on course to meet both goals. The U.S., for example, faces a budget gap of 7.3 percent of GDP next year versus 11.2 percent in 2010, and a debt of 114.2 percent of GDP in 2016, compared with 98.6 percent in 2010.

Measured Retrenchment

The hand of those advocating a more measured retrenchment has been strengthened by a mid-year global growth slump and signs that the prescribed austerity has not proved an elixir for Europe’s three year debt crisis. The IMF also changed course last month when it released research suggesting budget cuts have a bigger impact on economies than previously envisaged.

The G-20 said it will still ensure public finances are on a sustainable path and told those countries with fiscal room to support growth, drawing a commitment from them to underpin demand if it deteriorates. The group agreed that when officials next meet in Russia, they will identify “credible and ambitious” new debt targets for beyond 2016, policy makers said in the statement.

As President Barack Obama and Republican challenger Mitt Romney tussle for the White House, the U.S. was lobbied to deal with its so-called fiscal cliff that will hit in January unless lawmakers act. That marked a widening in focus on fiscal challenges beyond Europe, whose stresses have dominated recent G-20 talks.

Fiscal Tightening

The IMF estimates the threatened U.S. fiscal tightening is equivalent to 4 percent of GDP, the most since the 1940s and about double the U.S.’s current growth rate.

The global recovery is “very fragile and it is very important that it is not interrupted by an event such as the fiscal cliff,” Mexican central bank Governor Agustin Carstens told reporters.

Europe didn’t escape pressure although European Union Commissioner Olli Rehn argued the region was meeting the Toronto targets. While the euro region was praised for recent reforms and budget cuts in some countries, the G-20 called on policy makers to agree on a banking union and finish retooling their rescue fund to allow it to recapitalize banks.

German Finance Minister Wolfgang Schaeuble said the EU won’t have operational bank supervision before 2014, as the priority should be ensuring the oversight will work rather than delivering it quickly.

Bank Rules

The G-20 also said it remained committed to a full and timely implementation of new worldwide bank rules and to acting by the end of this year to resolve a transatlantic clash about over-the-counter derivatives. Global regulators set a September 2013 deadline to present tougher rules for money-market mutual funds, repurchase agreements and other so-called shadow banking activities.

The group restated past aims to move more rapidly toward greater market-determined exchange rate systems, refrain from competitive devaluations and avoid persistent currency misalignments.

Officials stuck to a January 2013 target for reviewing the way voting shares at the IMF are calculated, even though developed and emerging economies have so far disagreed on the method to use.

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The world's finance chiefs diluted budget-cutting commitments out of concern that a rush of U.S.-led austerity would choke already fragile global growth.
Monday, 05 November 2012 07:08 PM
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