Finance ministers of the world's leading economies have been so spooked by the sovereign debt crisis that they have decided they can no longer wait until economies are growing strongly before they remove fiscal stimulus.
The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, at the weekend also dropped proposals for a global banking levy, giving countries leeway to do what they thought best for their domestic circumstances.
The communiqué of the meeting made clear the G20 no longer thought expansionary fiscal policy was sustainable or effective in fostering recovery because investors were no longer confident about some countries' public finances.
“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it said. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.”
These words were in marked contrast to the G20's April communiqué, which called for support to be maintained until the recovery picked up steam.
After the meeting, finance ministers acknowledged the landscape had changed. George Osborne, British finance minister, claimed credit for this shift in tone.
Many other finance ministers accepted market realities had changed the G20's policy. Christine Lagarde, France's finance minister, said: “There's a large majority for whom redressing the public finances is priority number one. For a minority, it's supporting growth.”
Even Dominique Strauss-Kahn, managing director of the International Monetary Fund, who has championed fiscal stimulus since January 2008, recognised the world was suddenly different. Asked whether he felt comfortable with the change in tone, he replied: “Totally comfortable. I am not the champion of fiscal stimulus but the champion of right fiscal policy”.
But there were concerns around the G20 that the rush to reduce budget deficits would undermine recovery in the near term.
G20 officials said the US had been the most concerned about the new austerity drive and feared for the momentum for global growth. It had called in the meeting for China to revalue the renminbi and Germany to boost domestic demand, officials said.
Suggestions that Japan will soon need to draw up another fiscal stimulus package have been dismissed by the country’s finance minister, who told the Financial Times in an intervie
Tim Geithner, US Treasury secretary, yesterday urged the world's biggest industrialised countries to commit 2 per cent of their total gross domestic product during the next two yea