G7 meets on faltering world economy

As market turmoil returned, rich nation finance ministers met in Marseille yesterday to try and overcome their differences over whether to stimulate or slash in order to rekindle the faltering global economy.

The finance chiefs and central bank governors of the G7 group of industrialised nations began their talks a day after US President Barack Obama unveiled a $447 billion (€322-billion) jobs plan to energise the world’s largest economy.

The gloomy economic backdrop was underlined when US and European stocks dropped sharply after the sudden resignation of the top economist at the European Central Bank added to fears over the continent’s sovereign debt crisis.

An Organisation for Economic Cooperation and Development report issued on the eve of the meeting said that a new recession in some rich countries cannot be ruled out and the eurozone crisis could deepen.

The finance ministers from Canada, the US, Japan, Germany, Britain, France and Italy agree that urgent action is needed to avoid another recession. But they differ sharply on what approach to take, with the Americans clearly plumping for stimulus and the Europeans determined to railroad reform and austerity measures through Parliaments despite political opposition and massive street protests.

International Monetary Fund chief Christine Lagarde warned that there could be no foot-dragging about finding ways to boost growth.

The US package announced by Mr Obama was aimed at giving a kick-start to the stalled American economy. The centrepiece is a deeper-than-expected $240 billion payroll tax cut for employers and employees meant to keep money in the pockets of those most in need, spur demand and encourage firms to hire new workers.

Most European nations used stimulus spending to temper the effects of the recession that followed the 2008 financial crisis, but have now focused on cutting their deficits given their high debt loads.

German Finance Minister Wolfgang Schaeuble said that taking a stimulus approach in Europe would “aggravate the problems instead of resolving them”.

French President Nicolas Sarkozy, speaking in Paris, also said Europe was unlikely to follow the US example.

When asked if Europe needed a similar plan, Mr Sarkozy said: “No. A recovery plan, we’re not going to be asking Greece to do that.”

Greece’s European partners have been demanding that the country – which benefits from a massive bailout to head off a government debt default that would weaken the euro – slash state spending and raise taxes to reduce its deficit and debt levels.

US Treasury Secretary Timothy Geithner said in Marseille that European states needed to do more to prove that they have enough political will to deal with the financial crises roiling the continent.

“They’ve got more work to do in that area,” he told Bloomberg Television.

Mr Geithner said he did not expect any “dramatic” announcement out of the meeting but he did encourage European counterparts to commit to financial reform and “powerful, unequivocal financial force so that governments have time to make those reforms work”.

Libya’s new rulers have also been invited to the Marseille meeting in a follow-up to the economic support for the so-called Arab Spring announced at a G7 meeting in May.

The fledgling Libyan administration will today join Tunisia, Egypt, Morocco and Jordan as they explain how they plan to relaunch their economies and hear what help they can expect from the world’s major powers.