MercoPress. South Atlantic News Agency

G-20 challenge: how to reduce deficits and not kill incipient economic recovery

French Finance Minister Christine Lagarde promised “fine tuning”

Disagreements over how quickly to reduce inflated budget deficits and restore balance to the global economy risk will be one of the main issues to be addressed at the high-level Group of 20 talks this week in South Korea.

A plunge in the Euro and in global stock markets, triggered by fears that Greece's debt woes could spread to other Euro zone countries, has added urgency to the meetings of G20 finance ministers and central bankers in Busan.

With officials ruling out agreement on key financial and regulatory reforms, including a mooted global bank levy, the need to strike the right balance between trimming deficits and sustaining economic growth is anticipated to take centre stage.

“That is a shared imperative. We all recognize it” said US Treasury Secretary Timothy Geithner in Washington before leaving for South Korea.

“As the IMF says, we want those fiscal reforms to happen in a way that's growth-friendly,” he added. “Some countries are in a very strong position. Some countries need to move much more quickly.”

Another G20 official put the need for coordinated fiscal tightening more graphically: the Euro zone crisis had shown that some countries would have to withdraw stimulus earlier than expected, but not everyone should run to the other side of the boat at the same time.

Deputy Ministers were holding preparatory talks on Thursday, a day ahead of the start of the main meeting, which is itself clearing the ground for a June 26-27 G20 summit in Toronto.

The G20, the premier international economic policy coordination forum, brings together the world's systemically important rich economies and emerging markets. Together they account for 85% of global output.

Anxious to soothe global markets, the group is expected to back the Euro zone's deficit-cutting strategy, even though China and Brazil have expressed concern that the bloc has not acted more decisively.

French Finance Minister Christine Lagarde brushed off concern in some G20 capitals that Germany is preparing fresh belt-tightening even though its deficit, while above 5% of GDP, is modest by European standards.

Speaking to reporters in Paris, Lagarde said removal of the economic stimulus that governments put in place to combat recession was all a matter of “fine-tuning”. But added: “We need to be careful to avoid brutal shifts.”

Fiscally conservative Germany, the largest euro zone economy, is considering raising value-added tax to the full rate of 19% on certain items that now benefit from a lower rate of 7%, according to sources in the coalition government.

“If you abolish tax breaks, some will say that's a tax increase. At the end of the day, it's about having a sensible and balanced policy” German Finance Minister Wolfgang Schaeuble told the Bild am Sonntag paper last weekend.