World leaders walk economic tightrope in Canada

[June 28, 2010]  TORONTO (AP) -- Wary of slamming on the stimulus brakes too quickly but shaken by the European debt crisis, world leaders pledged Sunday to reduce government deficits in richer countries in half by 2013, with wiggle room to meet the goal.

Leaders of 20 major industrial and developing countries generally sided with cutting spending and raising taxes, despite warnings from President Barack Obama that too much austerity too quickly could choke off the global recovery.

"Serious challenges remain," they cautioned in a closing statement. "While growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt," according to the document from the Group of 20 major industrial and developing nations.

Obama told a news conference he was satisfied with the outcome, saying he recognized that countries had to proceed at their own pace in either emphasizing growth or budget austerity.

"We can't all rush to the exits at the same time," Obama said after three days of economic summitry.

Summit participants navigated a careful course between Obama's emphasis on growth and fellow leaders such as German Chancellor Angela Merkel who advocated spending cuts and even tax increases.

"Advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016," according to the statement. The gross domestic product, or GDP, measures the value of all goods and services, and is considered the best gauge of economic health.

At the same time, the statement called for following through on "existing stimulus plans," heeding Obama's concerns.

Japan was given an exemption from meeting the debt targets because of years of a stagnant economy, and the fact that its huge debt is largely owned by Japanese and not overseas investors.

Canadian Prime Minister Stephen Harper, the summit host, told reporters that deficit reduction "is not an end in itself" and that there is "an ongoing role for stimulus in the short term."

As the summit wrapped up, conditions on the streets of Canada's biggest city remained tense.

Police, responding more aggressively than the day before, raided a university campus and rounded up protesters in an effort to quell further violence after youths rampaged through the city the night before, smashing windows and torching police cruisers. Police said they arrested more than 600 demonstrators.

Harper blamed "thugs" for the violence and suggested the destruction and fires on the streets justified the $900 million that Canada spent for summit security.

World leaders also took note of the devastating oil spill in the Gulf of Mexico in their statement, which recognized "the need to share best practices to protect the marine environment, prevent accidents ... and deal with their consequences."

The April 20 explosion on the BP-leased Deepwater Horizon rig unleashed the worst offshore oil spill in U.S. history. BP is London-based and the disaster has contributed to strains between the U.S. and Britain.

Britain's new conservative prime minister, David Cameron, told reporters BP was working hard to cap the well, "clean up the mess" and compensate victims. At the same time, "what we all want is for this important company to be strong and stable for the future," he said.

The G-20 statement limits the deficit-reduction goal to the most industrialized nations and offers governments flexibility on when to start balancing their books.

French President Nicolas Sarkozy pointed out that "France has made even more stringent promises to its European partners on deficit-cutting."

Asked if summits were necessary, Sarkozy admitted that they can be exhausting. "We end these summits empty, tired, but it's our duty to participate," he said.

European countries, in particular, have been rattled by the near-default of Greece on its government debt.

The document doesn't endorse a bank tax advocated by Europe and the U.S. to set up a fund to pay for future bailouts. Canada, Australia and Japan, whose banks did not fail in the crisis, oppose the levy.

Instead, it says all countries should make sure taxpayers are not stuck with the bill when banks fail, and leaves it up to individual countries to decide how they want to do that.

Canada's Harper urged leaders to "send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order." He said global economies needed to walk a "tightrope" between deficit spending this year, ensuring the fragile recovery continues and then switching to deficit reduction programs.

The G-20 includes the world's major industrial countries -- the United States, Japan, Germany, France, Britain, Canada, Italy and Russia -- plus major developing nations such as China, India and Brazil.

Some countries will find it more difficult than others to meet the new deficit targets.

The United States ran a record deficit of $1.42 trillion last year, or 10 percent of its GDP. Private economists expect the deficit will decline only slightly to $1.3 trillion this year, which would amount to 9 percent of GDP.

Obama's budget plan from February would cut the deficit in half by 2012, as a percentage of GDP. He's also named a commission to examine how to trim the deficit further, to 3 percent of GDP -- a level economists generally view as sustainable.

Republicans have suggested it is unlikely that Obama will be able to meet his own deficit-reduction targets and say the White House has yet to put forward a credible plan. And critics complain that the deficit commission Obama set lacks the power to make Congress consider its recommendations.

Yet, the U.S. stands a generally good chance of meeting the targets, assuming a strengthening economy between now and then.

Britain is in worse shape. Its deficit this year is over 10 percent of GDP in 2010.

"For European countries with high budget deficits, especially for the U.K. with the highest budget deficit in the G-20, we have got to make our contribution to that sustainable growth by showing the world that we can live within our means," said British Treasury chief George Osborne. In a BBC interview, Osborne said that means stiff cuts in government spending.

Britain last week put forward a tough emergency budget, raising taxes and cutting spending by levels not seen since World War II.

On the other end of the spectrum, Canada's federal budget deficit will be less than 3 percent of GDP this year. Ottawa's plan aims to balance the budget by 2014-15.

As he opened the final session, Harper boasted that Toronto was "home of the most solid financial sector in the world." Its banking system was barely affected by the financial meltdown of 2008.

The deficit targets that the G-20 countries adopted had been outlined by Harper in a letter he sent to fellow leaders this month. But there were disagreements over them right through a dinner on Saturday night.

Treasury Secretary Timothy Geithner met Sunday for the first time with Japanese Finance Minister Yoshihiko Noda and stressed the importance of the G-20's call for strengthening rules for banks to set aside money as cushions against potential losses, according to a Treasury Department official.

Obama had urged the G-20 countries to avoid the costly mistake made during the 1930s, when countries reduced government support too quickly and ended up prolonging the Great Depression.

The joint statement made only a passing reference to the need for "greater exchange rate flexibility" and made no specific mention of China's recent announcement that it would allow its exchange rate to rise against the dollar.

That was a victory for the Asian superpower, which has repeatedly said it did not want to be lectured by other powers on exchange rates.

However, Obama, at his news conference, said: "The United States welcomes China's decision to allow its currency to appreciate in response to market forces. We will be watching very closely in the months ahead."

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Online:

Summit site: http://g8.gc.ca/home/

[Associated Press; By TOM RAUM and ROB GILLIES]

Associated Press writers Emma Vandore, Jane Wardell, Darlene Superville, Jeannine Aversa, Foster Klug and Martin Crutsinger contributed from Toronto.

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