Global Growth to Shift Focus to Cutting Debt: G-8

Friday, May 27, 2011

Global Growth to Shift Focus to Cutting Debt: G-8

 By Bloombreg

Group of Eight leaders said a strengthening global economy will pave the way to cuts in the debt built up during the recession that followed the 2008 financial crisis.

Europe vowed to fight its fiscal woes with“determination,” while President Barack Obama promised a“clear and credible” U.S. deficit-reduction strategy. Japanwas allowed to put off savings measures until its economy rebounds from the March earthquake and tsunami. 
“The global recovery is gaining strength and is becoming more self-sustained,” according to a draft statement prepared for the leaders at a two-day summit that ends today in Deauville, France. Without mapping out binding targets, the leaders pledged to “remain focused on the action required to enhance the sustainability of public finances.”

G-8 Says Stronger Global Growth to Shift Focus to Debt
Jose Manuel Barroso, president of the European Commission, Nicolas Sarkozy, France's president, U.S. President Barack Obama, walk with other Group of Eight heads of state and government as they arrive in Deauville, France. Photographer: Chris Ratcliffe/Bloomberg

The harshest economic crisis since the Great Depression drove debt in the U.S., Japan and the 17-nation euro region past the mark of 90 percent of gross domestic product that economistsKenneth Rogoff and Carmen Reinhart say can weigh on long-term growth prospects. 
Echoing that assessment, the Organization for Economic Cooperation and Development on May 25 warned that deepening holes in public finances may be a drag on the recovery. It predicted growth of 4.2 percent in the world economy this year and 4.6 percent in 2012.

‘Downside Risks’

“Downside risks remain, and internal and external imbalances are still a concern,” the G-8 draft said.“Commodity prices and their excessive volatility pose a significant headwind to the recovery.” 
Leaders of the G-8 -- the U.S., Japan, Germany, U.K., France, Italy, Canada and Russia -- will release a final text today at the end of the meeting hosted by French PresidentNicolas Sarkozy
The draft made clear that the wider Group of 20 --including developing countries such as China, India and Brazil - - has become the principal forum for steering the world economy. The next G-20 get-together is in November in Cannes, France. 
That meeting will try to work out an international radar system that warns of imbalances involving current accounts and budgets, as well as currency misalignments that threaten world growth. 
Oil prices reached a 31-month high of $114.83 on May 2 as the recovery boosted fuel demand and the war in Libya cut supply by 1.5 million barrels a day, according to economists Goldman Sachs Group Inc. Oil has since dropped to $100.49 late yesterday.

Oil Forecasts

Goldman’s economists now expect oil prices to touch $140 a barrel by the end of 2012, raising an earlier forecast of $120 a barrel, the bank said in a research note yesterday. 
The Standard & Poor’s 500 Index has gained about 5.5 percent so far this year, while the Europe’s Stoxx 600 is up about 0.5 percent. The global expansion has helped spur the euro as demand for the dollar’s haven status waned. The euro rose 0.6 percent this week, bringing its 2011 gain to 11.5 percent. 
Fiscal woes loomed over the discussions, with Europe preparing a second aid package to save Greece from default and the OECD forecasting debt of 107 percent of GDP in the U.S. and 218.7 percent in Japan by the end of 2012.

More Time on Greece

Europe’s chiefs said they would need more time to solve the Greek debt crisis as the leaders noted the strength of the euro even amid investor concerns that Greece may be headed for default, said European diplomats who briefed reporters today on condition of anonymity because the talks were private. 
“We will do everything to avoid a default or credit event,” European Union President Herman Van Rompuy told reporters in Deauville. “We will do everything to maintain financial stability in the euro zone.” 
The G-8 draft called for a “clear and credible medium-term fiscal consolidation framework” from Obama, who is bargaining with Congress over long-term deficit cuts as part of plans to raise the legal debt limit from $14.294 trillion. 
Obama told fellow leaders that the U.S. budget deficitlimited the country’s ability to act as the engine of the global economy, the European diplomats said. 
Within the rich world, Germany has spearheaded appeals for deficit reduction. German Chancellor Angela Merkel said yesterday that belt-tightening is needed “not just for us now but for coming generations and we must always have that in mind.” 
Japan, however, got more breathing room to spend its economy out of the slump triggered by the magnitude-9 earthquake and tsunami that killed about 23,000 people and unleashed the world’s worst nuclear disaster since Chernobyl in 1986.

Japan’s Finances

“In Japan, while providing resources for the reconstruction after the disaster, the authorities will also address the issue of sustainability of public finances,” the draft said. 
G-8 leaders also made another pledge to dismantle commercial barriers under the World Trade Organization’s Doha talks that remain unfinished business after almost a decade. That stalemate is the source of “great concern,” the text said. 
A free-trade pact would “spur the international economy,”Sarkozy told reporters. 
To contact the reporter on this story: James G. Neuger in Deauville, France at jneuger@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net