G20 clash over recovery prescriptions

Global policymakers are starting to clash over their individual prescriptions for recovery as Europe demands lower budget deficits while the United States warns against pushing exports instead of domestic demand.

At a meeting of Group of 20 finance chiefs in Busan, South Korea, over the weekend, Treasury Secretary Timothy Geithner said the world could not again bank on the cash-strapped US consumer to drive growth and urged other nations to stimulate their own demand.

European Central Bank President Jean-Claude Trichet said fiscal tightening in "old industrialised economies" would aid the expansion by shoring up investor confidence.

Each strategy carries threats for the global rebound that the G20 said faces "significant challenges".

Continued stimulus risks bondholder revolt over rising debt burdens, while spending cutbacks could worsen unemployment.

Relying on exports leaves the world prone to trade wars and competitive currency devaluations as countries seek to give their companies an edge.

"The world may end up in a period of sub-potential growth for two or three years,"said Venkatraman Anantha-Nageswaran, who helps manage about US$140 billion ($210 billion) in assets as global chief investment officer at Bank Julius Baer & Co in Singapore.

"We need to accept that all of us cannot simultaneously grow our way out of trouble."

The fragility of the recovery from last year's worldwide recession was evident as the G20's finance ministers and central bankers gathered to shape the agenda for this month's summit of their leaders in Toronto.

The Standard & Poor's 500 Index closed at a four-month low on Friday after government figures showed US employment rose less than forecast in May. The euro fell to as low as US$1.1889 over the weekend, its weakest level since 2006 amid concern Hungary was nearing a debt crisis.

G20 officials signalled deeper concern about the economic and fiscal outlooks than when they last met in April.

In a statement released after their talks ended, they promised to "safeguard recovery", yet replaced an endorsement of budget stimulus with a pledge to pursue "credible, growth-friendly measures to deliver fiscal sustainability".

Officials separately targeted deadlines of November to design new rules to raise the quality and quantity of capital held by banks and December 2012 to introduce them. UK Chancellor of the Exchequer George Osborne was among those to say the process for enactment may be extended.

A European and US proposal to tax banks globally to cover the cost of bailouts was defeated.

Banks have warned that the capital proposals may impinge on credit and growth. UBS, Switzerland's biggest bank, has estimated the proposals may force banks to raise as much as US$375 billion in fresh capital.

In a sign of tension among the world's economic policy chiefs, Geithner flagged concern that others are turning to cheaper currencies and fiscal restraint, leaving their rebounds reliant on foreign rather than domestic buyers for strength.

"Stronger domestic demand in Japan and in the European surplus countries" is needed, Geithner said.

The conundrum is that governments are all trying to harness a trade rebound, which the Netherlands Bureau for Economic Analysis last week estimated grew 3.5 per cent in March, more than double February's pace.

- BLOOMBERG