Obama, Europeans split on economic policy

Steven Thomma | McClatchy Newspapers

TORONTO — They talked nice, but President Barack Obama and European leaders failed Saturday to bridge a fast growing divide over government spending and will emerge from a weekend summit charting different courses for ending the global recession.

Obama will head home Sunday night with his government's foot still on the spending accelerator to stimulate the economy, saying it will cut back later. European leaders, however, are pledging to start cutting back government spending now.

The disagreement was the most notable divide at back-to-back summits of the G8 group of the world's top economies and the G20 group that adds in fast emerging economic powers such as China, Brazil and India.

The G8 leaders were united on other issues. They condemned North Korea for the sinking of a South Korean ship, promised to enforce new sanctions against Iran for its defiant nuclear program, spelled out a five-year exit strategy in Afghanistan and called Israel's restrictions on the flow of goods into Gaza unsustainable.

They tried to appear unified on the question of spending — despite Obama's pre-summit warning that European budget cuts now could risk a double dip into global recession and Europe's refusal to hear that warning.

"I have made it clear that we need sustainable growth and that growth and intelligent austerity measures don't have to be contradictions," German Chancellor Angela Merkel told reporters Saturday.

"The discussion was not controversial, there was a lot of mutual understanding," she added.

She did not, however, agree not to scale back her government's spending.

Nor did the new conservative government of British Prime Minister David Cameron.

In an interview timed to appear in Toronto during the summit, Britain's top financial minister stressed that spending too much is a greater threat than cutting back spending.

"The most obvious risk out there in the global economy is the sovereign debt at the moment and that's what we need to overcome," George Osborne, the chancellor of the Exchequer, told Toronto's influential Globe and Mail newspaper.

He said the new British government is modeling its plan to slash its deficits in part on an austerity budget enacted in Canada in the 1990s that got 80 percent of its savings through spending cuts.

That Canadian budget cut 10 percent of all government functions, and 20 percent of all government jobs.

Treasury Secretary Tim Geithner said Saturday that the United States is in better shape than Europe — and already committed to cutting its deficit after the economy is fully recovered.

"These actions ... will reduce our deficits by more than half as a share of the economy over the next four years, which is among the steepest declines projected across the G7," he said.

He said he was mindful of the pressures the Europeans have felt since a debt crisis in Greece threatened markets across the continent.

"We have to make sure that people understand that we're going to take the steps necessary to bring down our deficits over time," Geithner said. "But we also need to make sure we're growing. We have to find the right balance and that balance is going to differ across countries."

In his pre-summit letter to other leaders, Obama took a different tone, urging them to be ready to spend more and warning against early cutbacks.

"Should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avert a slowdown," he said.

"We must be flexible . . . and learn from the consequential mistakes of the past, when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession."

Obama found an ally in Indian Prime Minister Manmohan Singh.

"The purpose of G20 should be to ensure that the momentum of recovery is sustained and enhanced in the years to come," Singh told the Toronto Star in an interview published Saturday.

"But right now, the danger of deflation in the global economy is, in my view, much greater than the danger of inflation," Singh said.