G20 countries aim to reach consensus on global recovery

Finance ministers and central bank governors from the world’s leading economies are seeking to show common resolve to foster the global recovery.

Concern is mounting that weak European public finances will derail the stuttering momentum.

Meeting today and tomorrow in the South Korean port city of Busan, the ministers and officials from the Group of 20 want to restore confidence in financial markets, which has been badly dented since they last met in late April.

“The world economy is in a much better place,” Tim Geithner, US Treasury secretary, said this week. “The most important thing is to make sure everyone understands that we’re going to continue to work together to make sure we’re reinforcing this recovery.”

But while this positive language was repeated in briefings in capitals round the world, G20 finance ministers are facing an alarming dilemma.

While weak action to tackle surging public debt could result in a second financial crisis, the global recovery could also be harmed by co-ordinated cuts to public spending and tax rises aimed at slashing public deficits.

Christine Lagarde, French finance minister, said: “How do we pursue necessary fiscal consolidation – that’s to say budget consolidation or reduction of deficits – and on the other hand support economic growth? That’s the difficulty.”

While the G20 is unified in seeking faster growth and better public finances, differences over what approach to take are beginning to show.

Germany and Canada have worried publicly that the scope for fiscal stimulus has reached a limit.

To show its resolve, Germany announced new spending cuts last month . While they would have received little support from Britain a month ago, the new coalition government is now firmly in the same camp. “It’s all about tackling deficits and getting growth. The two are inseparable, especially for countries with the largest deficits like the UK,” a spokesman for the UK Treasury said. “What the eurozone crisis has shown is that unsustainable deficits – and the higher interest rates they risk – are the biggest threat to growth.”

Opposed to this overt display of fiscal rectitude, France and the US worry that with growth still fragile, any sudden and severe withdrawal of government support for the world economy would be counter-productive. Ms Lagarde agreed that fiscal consolidation was imperative, but added: “We need to be careful to avoid brutal shifts.”

Mr Geithner said: “As the IMF says, we want those fiscal reforms to happen in a way that’s growth friendly.”

The G20 meeting of finance ministers and central bank governors was scheduled as a preparation for the summit of world leaders in Toronto later this month.