MercoPress. South Atlantic News Agency

G20 leaders (mainly US and Europe) seem divided stimuli timing withdrawal

President Obama says Canada summit should safeguard and strengthen recovery

President Barack Obama has warned against cutting national debts too quickly as it would put economic recovery at risk. In a letter to G20 leaders, the US president said that while it was important to put in place “credible plans” to cut deficits, withdrawing economic stimulus early was dangerous.

“[In the past] stimulus was too quickly withdrawn and resulted in renewed hardships and recession,” he warned. But Mr Obama said the US would still aim to halve is own deficit by 2013 and cut it to 3% of GDP by 2015.

The leaders of the world's 20 leading economies are due to meet in Toronto on 26 June. Mr Obama said the priority of the meeting should be “to safeguard and strengthen the recovery”.

However across the Atlantic the head of the European Central Bank (ECB) stated that EU governments' borrowing levels should be more strictly policed in the future. Jean-Claude Trichet said rules on borrowing needed to be much stricter, with tougher sanctions in place for countries that break the rules.

Following the financial crisis, many governments borrowed huge amounts of money to pump into their economies. Concerns about high debt levels have subsequently destabilised markets.

But for many G20 countries, especially in Europe, the case for stimulating economic recovery using the public finances has been overtaken by concerns about stabilising government debt.

The governments of several large European countries, Germany, France and the United Kingdom among them, have recently outlined plans for spending cuts.

“The ECB believes that a true quantum leap is needed in the framework for surveillance and adjustment of fiscal policies,” Mr Trichet told the European Parliament's committee on economic and monetary affairs.
“A more stringent implementation of rules and procedures is essential. The [European] Commission should have greater responsibility by making proposals which can only be modified with unanimity in the [European] Council, rather than mere recommendations under the Stability and Growth Pact.“

Mr Trichet also called for ”quasi-automatic“ sanctions to be applied earlier and to be ”broader in scope” for those countries that break the rules.

Current EU rules state that governments' budget deficits must not exceed 3% of overall economic output, often referred to as gross domestic product (GDP). In the aftermath of the financial crisis, however, some governments saw their deficits grow to more than 10% of GDP.

Concerns about high levels of debt, particularly in Greece, Portugal and Spain, led to fears that some countries may be forced to default on their debt repayments. Stock markets fell as a result, and governments across Europe are now implementing spending cuts in order to cut their deficits.