European crisis highlights fragile global recovery

[February 06, 2010]  IQALUIT, Nunavut (AP) -- A crisis in Europe over unsustainable government debts that sparked renewed global market turmoil leapt to the top of the agenda Saturday for global financial leaders meeting half a world away in the Canadian Arctic.

Finance ministers and central bankers from the Group of Seven major industrial countries are also thrashing out differences on banking industry changes amid warnings that unilateral action like U.S. President Barack Obama's plan to break up big banks will further hamper the fledging economic recovery.

Canadian Finance Minister Jim Flaherty, the host of the gathering, is hoping that his choice of the remote town of Iqaluit, population 7,000, where temperatures can dip to 40 degrees below zero in February, would concentrate officials on the task ahead.

The United States was represented by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke. The G-7 consists of the United States, Japan, Germany, Britain, France, Italy and Canada.

The discussions were focusing Saturday on developments in the global economy, banking reform and proposals to grant further debt relief for earthquake-ravaged Haiti.

The meetings were scheduled to conclude with a joint news conference.

In a break from the usual routine, several of the international visitors ventured out on the ice for a dogsled ride immediately after flying in to the tiny outpost Friday. Flaherty planned to keep the tone of the rest of the gathering equally casual, telling reporters that more chats were planned for the fireside than around a formal table.

But in a contrast with the casual scene setting here, developments in Europe provided a sobering reminder that G-7 policymakers still face major hurdles repairing a broken global economy.

The Portuguese parliament's defeat of a government austerity plan triggered renewed concerns that it and other countries like Greece and Spain were having trouble tightening budget controls to manage their budget deficits, a development that could threaten the economic recovery in Europe.

Stocks fell in Asia and Europe, while the Dow Jones industrial average clawed back to a small gain after suffering the largest single-day drop in seven months, on worries about the global economy.

"I think we have to be very mindful of the failure or potential failure of domestic economies," Flaherty told reporters before talks formally started with a working dinner on Friday.

On the issue of banking reform, the other G-7 countries were expected to press Geithner to explain the announcement by Obama last month that the United States would seek tougher rules to prevent risky actions by big banks from toppling the entire financial system.

British Treasury chief Alistair Darling has led calls for more coordinated action on reform, warning that the U.S. proposal does not address the biggest threat of the links between banks that can quickly transmit loan troubles at one institution, like a virus, to the entire system.

Flaherty was diplomatic when asked about the concerns over Obama's unilateral move, but acknowledged finding ways of working together was an issue facing the group.

"Several countries have made banking sector proposals that are not entirely consistent, so it's a good reason to gather, a good reason to talk about it," he said.

Flaherty said that G-7 countries agreed on the need to continue with government stimulus programs to prevent the world from plunging back into recession.

However, Germany and France have expressed concern about how long stimulus aid should be maintained. They worry about soaring budget deficits and the risk of inflation.

Obama presented a budget plan Monday that would boost job-creation efforts and raise the U.S. budget deficit to a record $1.56 trillion this year. British Prime Minister Gordon Brown is also stressing government stimulus even though critics point out that the country's budget deficit as a share of its gross domestic product could reach 12 percent this year.

In Japan, where the economy has struggled for two decades, the government unveiled more stimulus spending last week.

Also planned for discussions was China's refusal to allow its currency to rise in value against the dollar, which critics see as a blatant effort to manipulate trade by making Chinese goods cheaper.

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Associated Press writer Rob Gillies in Iqaluit contributed to this report.

[Associated Press; By JANE WARDELL and MARTIN CRUTSINGER]

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