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>>G20 shifts from stimulus to austerity in final communiqué

June 5, 2010

A meeting of G20 finance ministers ended in South Korea today with a clear call on governments around the world to put their fiscal houses in order as the global economy remains in the grip of deepening market turmoil and uneven growth.

Although the meeting’s final communiqué said that the global economy was recovering faster than anticipated, the event was overshadowed by unresolved sovereign debt problems in Europe, warnings of worldwide “fragility” and frenetic attempts to play down suggestions that Hungary could be poised for a Greek-style crisis.

>The G20’s final communiqué introduced a surprise change of tone from the document produced by G20 finance ministers just six weeks ago — a shift for which Britain’s new Chancellor of the Exchequer, George Osborne, was keen to claim credit as he made his debut on the international summit circuit.

>>The April 23 G20 communiqué supported the idea that governments should continue to support growth with stimulus until the recovery is driven by the private sector. Today’s document, though, backed the sort of immediate fiscal consolidation being planned by Mr Osborne

"We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions,” read the second paragraph of the communiqué.

That part of the document — and the whole question of whether policy emphasis should be on deficit reduction or on maintaining stimulus — is understood to have been a source of wide and heated disagreement among G20 ministers.

“I think we’ve achieved a significant success by getting the endorsement of the G20 for the fiscal position we adopted just three weeks ago,” said Mr Osborne before beginning his return to the UK from a four-day visit to the Far East.

~>His comments were followed moments later by a warning from Dominique Strauss-Kahn, managing director of the International Monetary Fund, who said that global growth could take a hit if efforts to rebalance demand are not properly coordinated.

Although Mr Strauss-Kahn said that he was “totally comfortable” with calls on troubled countries to speed-up fiscal consolidation he cautioned that the process would have “some bad effect” on growth.

Other risks were also highlighted. Timothy Geithner, the US Treasury Secretary, preceded his arrival in Busan by sending a letter to his G20 colleagues in which he cautioned that the belt-tightening and greater saving by American household could reduce overall demand.

The rest of the world should accordingly be prepared to make up for that shortfall by generating demand of its own. The projected weakness in the large economies of Japan and Germany, he wrote, were a source of concern.

Although ministers played down the nature of their discussions on the euro and China’s currency, the yuan, G20 sources were clear that “robust discussions” had taken place. On the euro particularly, delegates France were heard strongly defending the currency’s credibility after its recent plunge to a four-year low.

Mr Geithner, who alluded to China’s currency policy in his pre-meeting letter, said on Saturday that the yuan question had been discussed “but only in the context of the need for a more flexible exchange rate policy”.

With US politicians complaining of unfair trade conditions arising from a falsely undervalued yuan, Mr Geithner is under mounting domestic pressure to officially label China a manipulator of its currency and to call more vociferously for Beijing to lift the currency’s two-year peg to the US dollar.

The meeting appeared to yield very little agreement — and only passing mention — on the proposal for a global bank tax to protect taxpayers from the theoretical costs of any future bailouts.

The idea has been strongly resisted by countries whose banks required no government support during the financial crisis, and the G20 has, for the time being, abandoned the discussion by “recognizing that there is a range of policy approaches.”

http://business.timesonline.co.uk/tol/business/economics/article7144663.ece