Rifts on crisis response split G8 finance talks

By AFP

July 15, 2010 Updated Jun 14, 2009 at 9:41 PM CDT

Rifts emerged at G8 talks in Italy on Saturday as Germany pressed governments to prepare to scale back huge deficits and spending while the United States urged countries to stay the course.

There were also divisions over US-style "stress tests" to check on the financial stability of crisis-hit European banks, with Washington and London in favour but Berlin warning that they could undermine economic confidence.

German Finance Minister Peer Steinbrueck said he shared the International Monetary Fund's view that stabilisation measures for economies hit by the economic crisis must "increasingly be combined with a credible exit strategy."

"This means we must now think about how will go about it once we are getting out of this hole, this valley," he said, adding that this applied to monetary and fiscal policy as well as the rescue efforts for the banking sector.

But other countries at the two-day G8 meeting of finance ministers in Lecce in southern Italy said it was too soon to think about exiting the crisis amid still tentative signs of the beginning of an economic recovery.

"We shouldn't get carried away with the recovery while we're still relaunching, stimulating and ensuring that our recovery plans work," French Finance Minister Christine Lagarde told reporters late Friday at the talks.

"We must be very prudent because the shock was extremely brutal," she said.

US Treasury Secretary Timothy Geithner said ahead of the meeting this week that he would urge fellow finance chiefs to stay the course on economic stimulus spending and financial reforms despite signs of the crisis easing.

"I think it is fair to say the force of the global storm is receding a bit. I think fundamentally those signs of improvement ... are the result of policy actions we have put in place here in the US and around the world," he said.

"Of course we want to see those actions sustained," he added.

Lagarde also said European ministers would explain to Geithner on Saturday that they are not yet ready to carry out "stress tests" on their banks.

Britain, which has already stress-tested its banks, has said its recovery could be delayed by other European states failing to clean up their banks.

"If there is a problem it doesn?t get any better by walking around it and hoping it will go away," British finance minister Alistair Darling told the Financial Times ahead of the talks.

"Because if you don't sort that problem you'll never sort out the economy."

Signs have emerged in recent weeks of a modest start to a recovery in countries such as Britain, France, Germany, Italy and the United States.

That in turn has sparked debate over "exit strategies," or how governments will rein in spending and cut massive debts incurred during the crisis.

Some warn however that it may be too early to declare the worst over while output in many parts of the world continues to decline and unemployment soars.

"There are relatively small but encouraging signs of a return to stability," Canadian Finance Minister James Flaherty said on Friday.

"I think what we need to work on is an exit strategy. There's been massive government involvement but now we need to plan, as growth returns, to withdraw from the private sector," he said.

"I don't think any of us want to have government-run economies," he added.

The International Monetary Fund has upped its forecast for global growth in 2010 to 2.4 percent, but the World Bank has said the recession in 2009 will be worse than expected and the WTO has said there are no signs of a trade recovery yet.

The talks include ministers from all the Group of Eight (G8) countries -- Britain, Canada, France, Germany, Italy, Japan, Russia and the United States -- and are set to finish at 1200 GMT with a joint declaration.

- Dow Jones Newswires contributed to this report -

To submit a comment on this article, your email address is required. We respect your privacy and your email will not be visible to others nor will it be added to any email lists.