A rift loomed at a summit of top finance officials here on Friday over drafting a so-called “exit agenda” from hefty stimulus government measures as the global economy now shows some signs of recovery from the recession and financial crisis.
While the United States and Britain are expected to urge members of the Group of Eight industrialized countries to stay committed to expansive monetary and fiscal measures, several European countries and Canada want unwinding those measures to be the main topic of conversation.
They argue that stimulus measures like the tax cuts, lower interest rates and expanding the money supply employed by Britain and the U.S. could fuel inflation and leave governments heavily in debt for years.
“I think what we need to work on is an exit strategy,” Canadian Finance Minister Jim Flaherty told reporters before meeting his G-8 counterparts for a working dinner. Canada, along with Germany and France, avoided many of the excesses of the credit boom that preceded the crash.
“There’s been massive government involvement — necessarily — in the economy in the industrialized world,” Flaherty said. “I think that was the right policy … but now we have to plan as the economies move toward growth that we withdraw significantly and let the private sector function.”
But U.S. Treasury Secretary Timothy Geithner has said he will urge fellow finance chiefs to stay the course on economic stimulus spending and financial reforms to avoid any risks to a fledgling recovery.
Geithner told reporters earlier this week that the “force of the global storm is receding a bit,” but said the U.S. and other countries have more work to do to build a sustainable economic recovery and establish the necessary financial reforms to make a repeat of the crisis less likely.
The two-day meeting in southern Italy is expected to be key to finding some common ground between officials from the U.S., Japan, Germany, France, Britain, Italy, Canada, Russia and the European Union to set the agenda for a meeting of G-8 national leaders in July in earthquake-stricken L’Aquila in central Italy.
Geithner had bilateral meetings planned with his Russian and Japanese counterparts Alexei Kudrin and Kaoru Yosano on Friday and with British Treasury chief Alistair Darling on Saturday morning.
As the officials take stock of measures taken so far to counter the crisis, there is more optimism than when they last met as part of the wider Group of 20 in England in April.
Financial markets have rallied strongly over the last three months largely on better-than-expected economic data, as well as hopes that the financial sector is stabilizing. Ten of the largest U.S. banks were ruled strong enough to repay $68 billion in government bailout money. And other data out on Thursday showed a rise in U.S. retail sales and lower U.S. unemployment claims, as well as rising global demand for energy.
But there are worries in the U.S. and Britain that continental Europe has not done enough to deal with the recession — hence the continuing dearth of resurgent signs in the euro zone economy, as underlined by a 21.6 percent fall in industrial production in the year to April in the euro zone.
The World Bank forecast on Thursday the global economy will contract 3.0 percent this year, far worse than a previous estimate of minus 1.75 percent.
“The Americans believe that the Europeans are ‘free riding’ on the back of American monetary and fiscal stimulus,” said Neil Mackinnon, chief economist at ECU Group.
Much hard data has yet to show improvements, with Germany, Europe’s largest economy, reporting a nearly 30 percent drop in exports in April as the global economic crisis continued to hurt demand for its products.
German Chancellor Angela Merkel has been one of the strongest public critics of the massive cash injections by Britain and the United States to boost their economies.
There is also potential division over whether Europe should plump for US-style “stress tests” to check the stability of its banks. Britain has conducted the tests, but released less detail on the results than the United States, while Germany has argued they could undermine the fledgling economic confidence.
British Treasury chief Alistair Darling indicated he would use the meeting to press other finance ministers to take tougher action on cleaning up their banks.
“If there is a problem it doesn’t get any better by walking around it and hoping it will go away,” he was quoted as saying by Britain’s Financial Times in an interview published Thursday.
Copyright 2009 The Associated Press.