Leading world economies pressed the United States on Sunday to act decisively to avert a rush of spending cuts and tax hikes, warning that the so-called fiscal cliff is the biggest short-term threat to global growth.
Unless a fractious Congress can move swiftly to reach a deal after the U.S. elections on Tuesday, about $600 billion in government spending cuts and higher taxes are set to kick in from Jan. 1 and could push the U.S. economy back into recession.
“If the United States fails to resolve the fiscal cliff it would hit the U.S. economy hard as well as the world and the Japanese economy, so each G20 country will urge the United States to firmly deal with it,” Bank of Japan Governor Masaaki Shirakawa said before a meeting of Group of 20 finance ministers and central bankers.
With a close U.S. presidential vote looming on Tuesday, as well as Congressional elections, there has been a delay in action to avert the fiscal cliff and there is uncertainty about whether Congress can reach a deal.
European delegates at the G20 meeting in Mexico City were particularly keen for details on the U.S. plan, according to those present at preparatory talks.
Canadian Finance Minister Jim Flaherty said that in terms of short-term risks to the global economic outlook, the U.S. fiscal cliff outweighed Europe’s debt crisis.
“They may not deal with it until the 11th hour and the 55th minute but I expect that they’ll do it just as they dealt with their banks in 2008,” he told reporters.
South Korean Finance Minister Bahk Jae-wan forecast the global economy could suffer during the first quarter of 2013 because of uncertainty about the fiscal cliff.
Nonetheless, he too was counting on Congress being able to find some kind of fix, telling Reuters: “I think compared to the euro zone crisis the fiscal cliff issue is much easier to solve.”
The euro crisis, which erupted more than two years ago, has eased after the European Central Bank said in September it was ready to buy more government debt. But investors are edgy about when or whether Spain will request an international bailout and how Greece’s deep financial problems can be fixed.
A draft communiqué being readied for the G20 policymakers said there were elevated risks facing the global economy, including Europe’s crisis and potential problems in Japan.
“Global growth remains modest and risks remain elevated, including due to possible delays in the complex implementation of recent policy announcements in Europe, a potential sharp fiscal tightening in the United States and Japan, weaker growth in some emerging markets and additional supply shocks in some commodity markets,” the draft said, according to a G20 source. The final communiqué will be published once talks end today, Nov. 5.
G20 officials said t he wording on Europe referred to differences among European governments over how to build a banking union, considered an important way to bolster the bloc’s shaky financial system, during 2013. France, Spain and Italy have been frustrated with German demands for the new scheme.
Few expect major agreements in Mexico with heavyweights such as U.S. Treasury Secretary Timothy Geithner – expected to stand down after the U.S. elections – European Central Bank chief Mario Draghi and top Chinese officials skipping the meeting.
GERMANY PRESSES ON DEBTS, DEFICITS
In a move that could revive tensions with the United States, Germany was pressing other countries on Sunday for new commitments on deficit and debt reduction targets beyond 2016.
Germany, the euro zone’s biggest economy which has faced criticism for its insistence on belt-tightening to restore confidence in the world economy, came to the meeting saying the United States and Japan shared as much responsibility as Europe for ensuring global economic stability.
“I think the focus is now increasingly balanced, on both the U.S. and EU,” a euro zone official said. “The difference being that there is recognition of and support for the EU efforts, while it is less clear how exactly the U.S. should address its issue.”
Most of the pressure on the United States to explain how the fiscal cliff can be avoided came from the European Commission, the executive body of the European Union, and from Germany, a senior G20 official said.
Policymakers are scrambling to stem a new slowdown in a global economy still limping after the 2008-09 financial crisis.
The G20’s consensus of four years ago, which helped stave off the risk of a new depression, has given way to deep differences over issues such as spending to boost growth and the right pace of belt-tightening to tackle high debt levels.
“It won’t be a straight choice between growth or fiscal rebuilding, such a debate has dangerous aspects,” an official from one G20 country said.
Another official said the G20 would resolve the differences by focusing more on structural reforms and on fixed targets for cutting deficits in heavily indebted countries, independently of the pace of economic growth. That would allow countries such as Spain or Greece to meet their targets this year and next despite deeper than expected recessions.
The International Monetary Fund last month cut its forecast for global growth to 3.6 percent for 2013, citing “familiar” forces dragging on advanced economies: fiscal consolidation and a weak financial system.
Officials are concerned about Japan’s own version of the fiscal cliff, a potentially crippling funding shortfall just as it risks sliding into recession.
U.S. and European officials are likely to come under pressure from G20 peers for dragging their feet on implementing the so-called Basel III accords. They would require banks to set aside more capital – potentially hurting profits – which is one of the key global responses to the financial crisis.
Countries which fail to introduce the rules could be punished, a Mexican finance official said.