MARSEILLE, France — The financial leaders of the world’s most developed economies were wrangling Friday over how to revive a faltering economic recovery at a time when interest rates are already low and government debt is high.
The so-called Group of Seven economies — the U.S., Canada, Japan, the U.K., France, Italy and Germany — are all facing a similar challenge. The recovery that began a little over a year ago is already running out of steam, but governments’ ability to boost growth is hampered after the financial crisis pushed up their deficits.
Christine Lagarde, the head of the International Monetary Fund, urged policymakers to take concerted action quickly. “The key … is for policymakers to act with conviction and urgency in tackling today’s challenges, while at the same time being nimble, should circumstances change,” Lagarde said in London before traveling to the G-7 meeting in Marseille, France.
But whether finance ministers and central bankers gathering here will actually find this kind of unity is questionable, with different nations touting widely divergent solutions to the crisis.
Arguments for austerity
As President Barack Obama on Thursday proposed a $447 billion plan to create jobs, Treasury Chief Timothy Geithner, in an opinion piece in the Financial Times, pushed countries with lower debts to slow down consolidation to give the world economy a much-needed boost.
That argument may not gain much traction in Marseille.
Germany, which weathered the financial crisis much better than most other developed economies, has already ruled out scraping cost cuts in favor of stimulus. Just days before Geithner’s piece in the Financial Times, German Finance Minister Wolfgang Schaeuble argued in the same newspaper that austerity was the only way of getting the eurozone’s struggling economies growing again.
Most other European countries have less of a choice when it comes to reviving their economies with extra spending.
Of all the G-7 states, Italy has been most embroiled in the debt storm. Its government debt, some 120 percent of economic output, is among the highest in Europe and its interest rates have jumped in recent weeks as investors fear that it may face a similar fate as fellow euro countries Greece, Ireland and Portugal.
But bailing out Italy, as the eurozone has done with the other three stragglers, would likely overwhelm the currency union and the government in Rome is currently pushing massive new spending cuts through parliament.
The U.K., which is outside the eurozone, has also embraced a strategy of austerity, although its central bank has taken a more expansive route than its eurozone counterpart, pumping billions of pounds into the British economy.
“We will stick to the deficit reduction plan we have set out,” Chancellor of the Exchequer George Osborne said Friday in London, before heading off to Marseille. “It is the rock of stability on which our economy is built,” Osborne added.
Updates on financial regulation
Other countries are trying to take the middle road.
French Finance Minister Francois Baroin said the debate over stimulus and austerity must be decided on a case by case basis.
“Regarding the question of whether to go with more stimulus or budgetary consolidation, there are some who defend a uniform policy,” Baroin said in an interview published in French daily Le Figaro Friday. “For my part, I prefer looking for what is most appropriate for each individual situation.”
Baroin said the G-7 talks will monitor progress made in reforming financial regulation, including requirements for larger capital cushions banks must keep to guard against market shocks. They will also debate reform of compensation rules for traders and bankers as well as regulation of high-frequency trading.
Finally, the meeting will take a look at so-called “parallel financial markets,” trades that do not go through a central stock exchange and have been blamed for increasing volatility during the crisis.
The talks come on the back of a starkly downbeat assessment of the global economic outlook Thursday by the Organisation for Economic Co-operation and Development. The Paris-based watchdog for the world’s most developed economies slashed its forecast for growth in the U.S. and the eurozone this year due to government belt-tightening and falling consumer and business confidence.
The U.S. will grow by only 1.4 percent this year, the agency said, down sharply from a forecast of 2.6 percent only three months ago. The combined economies of Germany, France and Italy — the three largest members of the eurozone — will grow by under 1 percent this year, less than half the OECD’s May forecast of 2 percent growth.