Group of Eight leaders said a strengthening global economy will pave the way to cuts in the debt built up during the recession that followed the 2008 financial crisis.
Europe vowed to fight its fiscal woes with “determination,” while President Barack Obama promised a “clear and credible” U.S. deficit-reduction strategy. Japan was allowed to put off savings measures until its economy rebounds from the March earthquake and tsunami.
“The global recovery is gaining strength and is becoming more self-sustained,” according to a statement after a two-day summit in Deauville, France. Without mapping out binding targets, the leaders pledged to “remain focused on the action required to enhance the sustainability of public finances.”
The harshest economic crisis since the Great Depression drove debt in the U.S., Japan and the 17-nation euro region past the mark of 90 percent of gross domestic product that economists Kenneth Rogoff and Carmen Reinhart say can weigh on long-term growth prospects.
Echoing that assessment, the Organization for Economic Cooperation and Development on May 25 warned that deepening holes in public finances may be a drag on the recovery. It predicted growth of 4.2 percent in the world economy this year and 4.6 percent in 2012.
“Downside risks remain, and internal and external imbalances are still a concern,” the G-8 said. “The sharp increase in commodity prices and their excessive volatility pose a significant headwind to the recovery.”
With unemployment at 9 percent in the U.S. and 9.9 percent in the euro area, leaders of the G-8 -- the U.S., Japan, Germany, U.K., France, Italy, Canada and Russia -- spiced the final version with more references to growth and job creation.
The statement made clear that the wider Group of 20 -- including developing countries such as China, India and Brazil - - has become the principal forum for steering the world economy. The next G-20 get-together is in November in Cannes, France.
That meeting, also to be hosted by French President Nicolas Sarkozy, will try to work out an international radar system that warns of imbalances involving current accounts and budgets, as well as currency misalignments that threaten world growth.
Oil prices reached a 31-month high of $114.83 on May 2 as the recovery boosted fuel demand and the war in Libya cut supply by 1.5 million barrels a day, according to economists Goldman Sachs Group Inc. Oil has since dropped to $100.58.
Goldman’s economists now expect oil prices to touch $140 a barrel by the end of 2012, raising an earlier forecast of $120 a barrel, the bank said in a research note yesterday.
The Standard & Poor’s 500 Index has gained about 5.5 percent so far this year, while the Europe’s Stoxx 600 is up about 0.5 percent. The global expansion has helped spur the euro as demand for the dollar’s haven status waned. The euro rose 0.4 percent this week, bringing its 2011 gain to 6.2 percent.
Fiscal woes loomed over the discussions, with Europe preparing a second aid package to save Greece from default and the OECD forecasting debt of 107 percent of GDP in the U.S. and 218.7 percent in Japan by the end of 2012.
Europe’s chiefs said they would need more time to solve the Greek debt crisis as the leaders noted the strength of the euro even amid investor concerns that Greece may be headed for default, said European diplomats who briefed reporters today on condition of anonymity because the talks were private.
“The euro zone is stable, growth has picked up quite nicely,” Sarkozy told reporters after the meeting. “It’s a paradox to talk about the problems of the euro when the euro has never been that strong. That strength can sometime be a problem for exports,” he said.
The G-8 statement called for a “clear and credible medium-term fiscal consolidation framework” from Obama, who is bargaining with Congress over long-term deficit cuts as part of plans to raise the legal debt limit from $14.294 trillion. Deficit cuts will be “consistent with considerations of job creation and economic growth,” according to language added in overnight.
Obama told fellow leaders that the U.S. budget deficit limited the country’s ability to act as the engine of the global economy, the European diplomats said.
Within the rich world, Germany has spearheaded appeals for deficit reduction. German Chancellor Angela Merkel said in Deauville that belt-tightening is needed “not just for us now but for coming generations and we must always have that in mind.”
Japan, however, got more breathing room to spend its economy out of the slump triggered by the magnitude-9 earthquake and tsunami that killed about 23,000 people and unleashed the world’s worst nuclear disaster since Chernobyl in 1986.
“In Japan, while providing resources for the reconstruction after the disaster, the authorities will also address the issue of sustainability of public finances,” the statement said.
G-8 leaders also made another pledge to dismantle commercial barriers under the World Trade Organization’s Doha talks that remain unfinished business after almost a decade. That stalemate is the source of “great concern,” the text said.
A free-trade pact would “spur the international economy,” Sarkozy said.