US demands Europe’s strongest nations support the weak

THE United States pressed Europe’s strongest economies yesterday to give “unequivocal” financial support to weaker euro zone states to overcome a debt crisis that threatens the world economy.

“It is completely within thecapacity of the stronger members of the euro area to absorb these costs,” US Treasury Secretary Timothy Geithner said as the Group of Seven (G7) finance chiefs gathered in Marseilles to discuss how to revive a stalling recovery.

“Those costs would be much, much greater for them and their economies if they sit here and do nothing, and they recognise that,” Geithner said in comments that appeared to be aimed primarily at EU economic powerhouse Germany.

With markets looking to the G7 major industrial economies for some sign of a policy shift to help faltering growth, a G7 source said the meeting might after all issue a communique, which G7 chair France had said was not planned.

Ministers and central bankers were under pressure to calm the biggest confidence crisis in financial markets since the 2007-08 global credit crunch.

But a shock announcement that the top German official at the European Central Bank (ECB) is leaving early in disagreement with the bank’s policy of buying eurozone government bonds to support the likes of Italy and Spain, laid bare deep rifts over how to manage the debt crisis.

The ECB confirmed that chief economist Juergen Stark would retire nearly three years before his term is due to expire.

This means Bank of Italy governor Mario Draghi will start his term in November with a mountain to climb to restore its credibility with Germany.

France has called for a co-ordinated response from the G7 industrialised nations after mounting anxiety over Europe’s debt crisis and the fragility of its banks caused a big fall in world stock markets in recent weeks.

Differences between the economic problems facing the eurozone, Britain and the US — which unveiled a $447 billion (€327bn) jobs package on Thursday — are complicating the task though, meaning one-size-fits-all solutions will not work.

IMF chief Christine Lagarde said policymakers in advanced economies should use all available tools to boost growth and called for bold action to weather a “dangerous new phase” of recovery.

She also cautioned against too much fiscal consolidation in a climate of sputtering growth.

But a G7 source said a unanimous deal on co-ordinated monetary easing was unlikely.

A source in Brussels has said the G7 would likely agree to keep monetary policy accommodative, slow fiscal consolidation in states where that is possible, and implement structural reforms. Fears the global economy may be in its most difficult period since the collapse Lehman Brothers, have added significance to the talks but there has been little evidence of the unity of purpose shown in 2008 and 2009.

US President Barack Obama’s new package of tax cuts and spending could lift US growth by one to three percentage points in 2012 and add more than a million jobs.

But in debt-ridden Europe, there is little scope for fiscal stimulus, and where there is some wiggle-room — in Germany and Britain — there is no political appetite for it.

In an indication of the conflicting positions on policy, Canadian finance minister Jim Flaherty said decisive moves were needed to restore market confidence and said slowing fiscal consolidation too much would be foolish.

“I hope we would all agree we have to stay the course, that we have to go through the pain of fiscal consolidation. It’s not easy, it creates stresses in some countries, but it’s necessary, we have to get through this rough patch,” he said.