G-7 Finance Chiefs Clash on Budget Cutting Amid Growth Weakness

Global finance chiefs clashed over the correct speed of budget cutting as they sought fresh ways to rally the slowing world economy.

With a Group of Seven meeting getting under way in the U.K., Treasury Secretary Jacob J. Lew cited the U.S. as a model for focusing on ensuring expansion first and fiscal consolidation later. While that stance won French support, Bundesbank President Jens Weidmann pushed back and Canadian Finance Minister Jim Flaherty criticized it as “ambiguous.”

“The Americans need to be more clear where they stand on this,” Flaherty said in an interview in Aylesbury, north of London. “They seem to be wanting to encourage economic growth more than fiscal responsibility.”

The disagreement is the latest in the long-running debate over whether austerity deepens slowdowns or helps end them by boosting investor confidence. It has swung in recent weeks in favor of those preferring added stimulus as Europe’s recession persists even after three years of axing budgets.

“Every country is in a different position,” said Clay Lowery, a former U.S. Treasury official and now vice president of Rock Creek Global Advisors LLC in Washington. “Ideally you want coordinated macro policies as much as possible. But realistically, how often in the past have we been able to have G-7 countries come to agreement on macro policies?”

Lew’s View

The G-7’s finance ministers and central bankers are gathering as their host, U.K. Chancellor of the Exchequer George Osborne, urges them to “nurture the recovery” amid signs economies face another soft patch. The meeting will conclude today and officials say there may not be a closing communique.

Lew said he will press European policy makers to intensify efforts to revive their economies by rethinking the pace of budget cuts and seeking ways to unfreeze credit markets.

“We feel very strongly there needs to be the right balance between austerity and growth,” he said in an interview on CNBC Television. “Overall, Europe is going to need to do a little bit better. There’s room for progress.”

The U.S.’s approach of “scheduling the deficit reduction to come a little bit later has left us with a stronger economy,” he said.

Austerity ‘Dogma’

Such lobbying has fallen on more receptive ears in recent weeks with French and German officials acknowledging to varying degrees a need to soften their fiscal squeeze after the euro area recession outlasted forecasts and unemployment reached a record 12.1 percent. Countries including France and Spain may be given longer to meet European Union deficit goals and Italy elected a government pledging to reverse some of its predecessors’ policies.

“We reject an austerity track, this dogma which slows growth,” French Finance Minister Pierre Moscovici said in an interview with Deutschlandfunk radio. EU Economic and Monetary Affairs Commissioner Olli Rehn said that “we can, for the moment, afford a smoother path of fiscal adjustment.”

In the biggest rhetorical shift, the German government is indicating acceptance that austerity can be overdone. There is “enough room to maneuver” for nations to act after having reduced budget deficits and bond yields, German Finance Minister Wolfgang Schaeuble said May 9.

Weidmann Disagrees

Not everybody agreed with Lew. Countries must deliver on pledges to reduce deficits, as restoring confidence in public finances is “one important precondition for sustainable growth,” Weidmann said.

Flaherty said the G-7 should be recommitting to debt reduction plans after many last year missed and then scrapped 2010 targets he helped negotiate.

“There is a desire to have much more emphasis on incentives on stimulus than on what they call austerity,” he said in an interview, adding that growth and budget discipline aren’t “mutually exclusive goals.”

Osborne has also signaled he will resist foreign pressure to slow the U.K’s austerity drive, which is running into criticism from the International Monetary Fund. “Government deficit and debt levels are too high in a number of G-7 economies -- including the U.K.,” he said. “We should reaffirm our resolve to deal with these and there are more areas of agreement than is commonly assumed.”

While the yen weakened below 101 per dollar for the first time since April 2009, none of the delegates criticized Japan’s campaign to bolster its economy through monetary stimulus even if it pushes up their exchange rates. Bank of Japan Governor Haruhiko Kuroda reiterated that officials aren’t targeting a currency level as the central bank boosts bond-buying to hit a 2 percent inflation target.

“Everybody has said they would never seek to manipulate foreign exchange rates as an instrument to boost growth,” Schaeuble said. Lew said that “the world community has made clear that domestic tools that are designed to deal with domestic growth are within the bounds of what the international community thinks is appropriate.”

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