Europe in the firing line amid G20 talks

Europe's economic policies came under blistering scrutiny as world leaders gathered in Toronto, with the Old Continent being cast by allies as the sick man of the global economy.

Leaders from the Group of 20 top economies huddled in Toronto to discuss policies that might put some heat in a tepid global recovery and turn the page on the worst financial crisis since the Great Depression.

But Europe – rocked by a sovereign debt crisis that has threatened the future of the euro and the decades-long movement towards continental integration – found its prescriptions rejected by global partners.

Even before the landing gears were down on the planes of late-arriving leaders, Europe's biggest hitters were forced to admit their ideas for a global bank tax to moderate financial sector excess had been shot down in flames.

A proposal from Britain, Germany and France to impose levies on banks' liabilities or profits appeared to receive close to no backing from other G20 members. "Three countries supported this idea. We are a year into the process and there are still three countries which support the idea," said a senior G20 official. "The parrot is not sleeping, it is no more. It's dead."

German Chancellor Angela Merkel conceded defeat. "We have to expect that we will get a negative decision," she said. "The French president and myself will speak in favour of it tomorrow but unfortunately we ... don't have a consensus, neither on a bank levy nor on a financial tax."

The three countries are now expected to move ahead alone with domestic banking taxes, despite initial fears that it may make their banks less competitive. But worse may be to come.

With investors demanding ever-higher risk premiums for lending to indebted European nations, the leaders from Britain, France and Germany arrived at the summit pledging to dramatically cut budgets to put their books in order.

But that plan come under attack from the United States, which voiced concern that the recovery could be put at risk if government spending is cut too quickly and domestic demand dips.

That concern bubbled to the surface yesterday when US Secretary of the Treasury Timothy Geithner said Europe and Japan must do more to fuel domestic demand.

"I don't think that you've seen from those countries yet a set of policies that would, again, give everybody confidence that you're going to see stronger domestic demand growth in those countries coming forward," he said.

"This recovery is now being led by very strong growth in the emerging markets and a solid expansion in the United States.

"Growth started somewhat later in Europe and Japan and it's projected to be somewhat slower over time, and it's still dependent on exports to the rest of the world."

Meanwhile, Brazil warned that Europe's plans would also hurt emerging economies. Brazilian Finance Minister Guido Mantega called for any budget cuts "to be realistic and not inhibit growth".

"If the cuts take place in advanced countries it is worse, because instead of stimulating growth they pay more attention to fiscal adjustments, and if they are exporters they will be reforming at our cost."

Leaders to strike balance between debt and growth

With a global recession behind them, world leaders yesterday sought to show they can bolster a fragile economic recovery while also cutting massive government debt levels.

US President Barack Obama, China's Hu Jintao and leaders from the rest of the Group of 20 economic powers gather for the fourth time since the financial crisis spilling out of the United States in 2007 fuelled fears of a new Great Depression.

The G20, spanning the emerging economic powers as well as the developed economies where the trouble started, united last year to throw trillions of dollars into the battle against recession. The group has since become the predominant forum for co-ordinating the tackling of global economic challenges.

With sluggish growth in many developed countries right now, Washington fears Europe's drive to slash post-recession debt could derail the upturn, a worry also voiced by other G20 leaders, including Indian Prime Minister Manmohan Singh.

But Obama, like many of his counterparts, is also keen to preserve the unity of the G20.

"We are aiming in the same direction, which is long-term sustainable growth that puts people to work," he said.

The G20 leaders are set to announce a concerted effort to halve public sector deficits within three years and stabilise government debt as well, but also recognise that the start of that process will take place at different speeds, according to a draft communiqué that Reuters obtained.

The document acknowledges that after the downturn, the economic recovery varies in pace across the world and there is a delicate balance needed between restoring budget discipline and sustaining growth.

"There is a risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery," it says. "There is also a risk that the failure to implement consolidation when necessary would undermine confidence and hamper growth."

Indeed, the main source of growth now is not the most advanced economies but the likes of China and other large emerging market economies, which are also worried about the debt woes of the industrial countries.

The aggregate debt of advanced countries within the G20 is expected to hit 107.7 per cent of GDP this year, almost three times the 37 per cent debt forecast for emerging market economies of the G20, and up from 80.2 per cent at the outset of the crisis in 2007.

The G20 leaders are also set to commit to tougher capital requirements for banks and welcome Beijing's recent announcement it will shift to a more flexible exchange rate over time – a move some hope will lead to a rise in the yuan and to fairer competition in world trade as a result.

The G20 gathering started with a working dinner on Saturday in the heart of Toronto, where some demonstrators smashed windows and set police cars on fire, marring an otherwise peaceful march by thousands of protestors. There are clear signs that the sense of urgency that united the G20 countries last year to combat recession is no longer as strong after they pulled through the storm. (Reuters)

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