G-20 leaders facing worries about rising deficits

[June 24, 2010]  WASHINGTON (AP) -- World leaders who addressed a severe economic crisis with an unprecedented show of strength last year are finding it harder to maintain their solidarity in the face of new challenges.

Despite U.S. appeals to refrain from removing stimulus measures too quickly, country after country is rushing to slash spending and raise taxes to avoid suffering the same fate as Greece, which found itself on the brink of bankruptcy last month.

After maintaining remarkable unity at three previous summits, the leaders of the world's major economies will come to Canada facing a good deal of tension over the best approaches to take to make sure that the global economy continues to emerge from the worst recession in decades.

In addition to a split over stimulus spending versus deficit reduction, the leaders will also be facing differences over the best approach to take to overhauling regulation of the financial system to make sure that the banking meltdown that precipitated the global crisis in the fall of 2008 is not repeated. Many of those issues are unlikely to be resolved.

The discussions will start Friday among the Group of Eight -- the world's wealthiest nations, plus Russia -- at a lake resort north of Toronto. They will then expand into discussions among the G-20, which includes the wealthiest countries plus major emerging economies such as China, Brazil and India, on Saturday and Sunday in Toronto.

Senior White House officials said Wednesday the G-8 talks would center on development issues, including support for maternal and child health care in poor nations. The officials said President Barack Obama and the other G-8 leaders would also focus on a range of foreign policy issues, such as escalating tensions between North and South Korea, Iran's nuclear program and the stalled Middle East peace process.

While the global economy is beginning to grow again, high unemployment and a European debt crisis this spring have served as reminders that the recovery remains fragile.

Seeing the crisis that enveloped Greece, other nations have grown concerned about their high debt levels and have been rushing to put into place deficit-reduction programs.

The new Conservative government of British Prime Minister David Cameron announced an emergency budget Tuesday that includes the toughest cuts in public spending in decades and an array of tax increases. Britain's budget cuts and tax increases followed similar deficit-cutting plans announced in recent days by Germany, France and Japan.

Those cuts have raised worries in the United States that the world could be in danger of making the same mistakes leaders made back in the 1930s, when they withdrew government support too soon and prolonged the Great Depression.

Treasury Secretary Timothy Geithner and Lawrence Summers, head of the president's National Economic Council, emphasized Wednesday that "without growth now, deficits will rise further and undermine future growth."

But other countries have been urging greater fiscal discipline, saying a possible market meltdown -- if the Greek debt crisis spreads -- presents a bigger threat to the global economy at the moment.

Canadian Prime Minister Stephen Harper, the host for the weekend talks, sent his own letter last week calling on the G-20 countries to set ambitious goals to cut their budget deficits in half by 2013.

Harper said that while countries had to be careful to support near-term growth, it was also important to produce credible deficit-cutting plans "to dispel the uncertainty and financial volatility that can impair our future growth prospects."

"A lot of countries are looking at what happened to Greece and saying it could happen to us, too," said David Wyss, chief economist at Standard & Poor's in New York. "The Europeans are much more worried now about debt and they are cutting back on stimulus spending."

Administration officials insist the differences between Obama and the other G-20 nations are not that great. They say Obama sees the need to set deficit-reduction goals but believes it would be wrong to implement those programs this year with unemployment still painfully high.

Many private economists agree, arguing that while the United States and other nations have returned to positive growth, those gains have not been enough to put much of a dent in unemployment.

"The global economy is still very fragile," said Mark Zandi, chief economist at Moody's Analytics. "Countries have to balance the need for continued support now while also putting together credible deficit cutting plans that can be implemented down the road."

Even before the talks began, the United States scored two victories with a move by European governments to shore up confidence in their banks by implementing a series of stress tests and an announcement by China that it will allow its currency to appreciate in value against the dollar.

The administration believes the stress tests the United States conducted a year ago marked a major turning point in the U.S. financial crisis, convincing investors that U.S. banks had the capital resources needed to withstand a severe recession.

In China, President Hu Jintao's government began Monday to allow its currency to rise in value against the dollar after having fixed the yuan-dollar exchange rate for the past two years.

A more flexible yuan was seen as a critical development by the administration to fulfill one of the G-20 pledges to address dangerous imbalances, such as China's massive trade surpluses and the United States' huge trade and budget deficits.

Critics in Congress are still threatening China with sanctions unless the yuan moves significantly. Commerce Secretary Gary Locke told Congress on Wednesday that the administration still viewed the yuan as undervalued and a drag on U.S. exports. Obama will hold one-on-one talks with China's president Saturday.

[Associated Press; By MARTIN CRUTSINGER]

Associated Press writer Stephen Ohlemacher contributed to this report.

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