World Leaders Agree on Timetable for Cutting Deficits
By SEWELL CHAN and JACKIE CALMES
Published: June 27, 2010
TORONTO — Leaders of the world’s biggest economies agreed Sunday on a timetable for cutting deficits and halting the growth of their debt, but also acknowledged the need to move carefully so that reductions in spending did not set back the fragile global recovery.
Luke Sharrett/The New York Times
President Obama cautioned that “our fiscal health tomorrow will rest in no small measure on our ability to create jobs today.”
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Times Topic: Group of 20
Luke Sharrett/The New York Times
President Obama and other world leaders at the Group of 20 summit meeting in Toronto on Sunday.
The action at the Group of 20 summit meeting here signaled the determination of many of the wealthiest countries, after enacting spending programs to counter the worldwide financial crisis, to now emphasize debt reduction. And it underscored the conviction of European nations in particular that deficits represented the biggest threat to their economic stability.
President Obama and Treasury Secretary Timothy F. Geithner had consistently advocated a measured approach to debt reduction that would not stymie growth and lead to a double-dip recession.
The United States, however, joined other countries at the summit meeting, which was met by protests and several hundred arrests, by endorsing a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016. Canada’s prime minister, Stephen Harper, had proposed the targets, backed by Germany and Britain.
To assuage objections from the United States, Japan, India and some other countries, the timetable was couched as an expectation, rather than a firm deadline. The G-20 joint statement explicitly stated that Japan, which is heavily dependent on domestic borrowing, was not expected to meet the targets.
The divisions were in contrast to the unity that characterized the previous three G-20 leaders’ summits, when the urgency of a potential global collapse produced solidarity and a unified economic approach. Although Mr. Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.” In essence, the leaders were blessing their decision to go their own ways.
The joint statement acknowledged both sides of the debate. “There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery,” the statement said. “There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth.”
In a news conference at the conclusion of the summit meeting, Mr. Obama referred only indirectly to the disagreement with Europe, saying, “We must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs today.”
His concern about stimulus was echoed by some economists who viewed the pledge on deficits as imperiling the prospects for growth.
“China’s growth, specifically, is not seen as sustainable at current rates,” Ronald A. Kurtz, professor of global economics and management at the Massachusetts Institute of Technology, said in an e-mail message. “The G-20 declaration therefore amounts to saying ‘assume a miracle’ for global growth.” He said Europe’s fiscal austerity plans would also slow growth.
But Dominique Strauss-Kahn, head of the International Monetary Fund, said he thought the risks of a new downturn were minimal.
“We don’t forecast any double dip,” he said. “Double dip was not discussed at the meeting.”
It is the first time the G-20 has set dates for deficit reduction, but the timetable, which is not binding, will probably not require new policy actions. Most of the governments, including the United States, have already put forward budget proposals in line with the targets.
The leaders also discussed banking regulations, but could not agree on a proposal for a global bank tax, supported by the United States, Britain and the European Union, but opposed by Canada and Australia.
And while the G-20 reaffirmed a deadline — their next meeting, in November in Seoul, South Korea — for agreeing on new capital standards for banks, they signaled that several countries might not implement the standards by 2012, as initially planned.
“While the illusion of progress is good, I don’t see real action to alter the imbalances that brought us to this crisis,” said Raghuram G. Rajan, a former chief economist at the International Monetary Fund who is now a professor in the Booth School of Business at the University of Chicago.
The United States, he said, continues to run large trade deficits financed by Germany, China and Japan. “The U.S. has been the world’s consumer of first resort,” he added, “and because it has been unable to persuade other countries to spend more or to reform quickly, it is likely to take up that position once again.”
Though Mr. Obama did not prevail in his emphasis on stimulus, he did arrive in Canada with three victories under his belt.
European leaders had agreed to conduct stress tests on their big banks, an exercise successfully undertaken in the United States last year, in an effort to restore market confidence. China had announced that it would allow a gradual appreciation of its currency. And Congressional negotiators had agreed on a far-reaching overhaul offinancial regulations.
But those accomplishments did not alter the mix of lagging growth, heavy debts and anxious voters that pushed European leaders to press for austerity.
“The U.S. may be concentrated on premature fiscal tightening, but most other countries are looking with a nervous eye to the sovereign debt mess in Europe,” said Kenneth S. Rogoff, a Harvard economist and former I.M.F. chief economist. “Aiming for a gradually improving debt-to-G.D.P. ratio by 2016 is hardly wild-eyed fiscal conservatism.”
In that light, the G-20 outcome was a victory for Chancellor Angela Merkel of Germany, who argued that without actions to rein in spending, investors would drive up governments’ borrowing costs, as they did in Greece.
Mr. Obama said, “We helped to draft this communiqué, which reflects our policies,” and added, “Keep in mind that we had already proposed a long time ago that we were going to cut our deficits in half by 2013.”
He continued, “We can’t all rush to the exits at the same time.” But he also said that for all the talk of German austerity, it was actually reducing its spending gradually, and not any more quickly than the United States.
While aides to Mr. Obama said that the G-20 statement was in line with budget plans he had already announced, others said it was a move toward austerity.
“The best thing that countries with fiscal challenges can do is to show that they can live within their means,” George Osborne, Britain’s chancellor of the Exchequer, said. “Barack Obama has recognized that.”
The mood here was far less anxious than in November 2008, when the G-20 leaders converged for the first time, in Washington, to battle a still-raging financial crisis. But it was hardly cheery.
While China did not make any new commitments, the G-20 statement appealed to China to increase spending on infrastructure, let its currency fluctuate and strengthen social protections.
Those actions are part of what economists call rebalancing — a reorientation of the world economy to be less reliant on debt-financed spending by North American and Western European consumers. China is the largest growth engine but its workers save too much and spend too little, some economists say.
At China’s urging, the G-20 leaders removed from their joint statement a proposed clause that would have praised China for agreeing to greater exchange-rate flexibility. Mr. Harper said he understood China’s wish not to be singled out, for either criticism or praise, but added, “When you make commitments on the world stage, you will be held accountable for them.”
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