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Leaders pledge to save world economy

"Against the background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth," the G20 leaders said in a summit communique.

business Updated: Nov 16, 2008 13:44 IST
Alister Bull

World leaders on Saturday emphasized the role that fiscal policy must play in repairing their dented growth, paving the way for individual governments to flesh out concrete details in the weeks ahead.

"Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth," the G20 leaders said in a summit communique.

Interest rate cuts were identified as an important tool "as deemed appropriate to domestic conditions," but leaders stressed that fiscal policy will have a bigger role to play.

"Monetary policy alone will not be sufficient to take the global economy through this crisis. There will have to be fiscal action, and there will have to be additional fiscal action," said Canadian Prime Minister Stephen Harper.

British Prime Minister Gordon Brown saw this yielding "coordinated and concerted stimulus through the use of budget measures to support demand in our economies. I believe we will see many countries follow this lead in the next few weeks."

China has already announced $560 billion of spending to boost growth and U.S. Democratic lawmakers on Monday will propose a $25 billion bailout for ailing U.S. carmakers, to be carved from an existing $700 billion rescue package.

U.S. President-elect Barack Obama, who did not attend the summit hosted by President George W Bush, is expected to push for significant public infrastructure spending once he is inaugurated on Jan. 20, 2009.

European Union budgets are constrained by the Stability and Growth Pact that limits deficits to 3 percent of gross domestic product. The communique noted fiscal action must "maintain a policy framework conducive to fiscal sustainability."

DIFFERENT STAGES

U.S. officials said that different countries were at different stages of their plans on spending packages and that this had prevented the G20 summit from delivering more specific details on proposed government action.

Global demand has been badly chilled by a credit crisis sparked by the collapse of the U.S. housing market. The International Monetary Fund predicts advanced economies in 2009 will suffer their first collective recession for 60 years.

Australian Prime Minister Kevin Rudd said $1 trillion of public money had already been put up to pad spending around the world. But he added that the IMF had warned leaders on Saturday that it expects $1.8 trillion worth of economic activity to be drained away by the crisis next year.

"The challenge we face is to continue to provide further stimulus," he told a briefing after the summit had ended.

IMF Managing Director Dominique Strauss-Kahn said that taxpayers would get a far larger bang for their buck if public spending programs were aligned across borders.

"It's time for coordination. I welcome the emphasis on fiscal stimulus, which I believe is now essential to restore global growth," he told a post-summit news conference.

"Each country's fiscal stimulus can be twice as effective in raising domestic output growth if its major trading partners also have a stimulus package. Everywhere, where you have low inflation, this has to be considered," he said.

Strauss-Kahn also said that the G20 communique's reference to monetary policy was aimed at countries that still had some room to ease, but not the U.S. Federal Reserve, which has already slashed rates to 1 percent.

U.S., European and Asian central banks delivered the first ever coordinated rate cut in October and the European Central Bank is expected to ease again after a half percentage point cut on Nov. 6 that lowered its key rate to 3.25 percent.

"There is some room for monetary policy in different parts of the world. Not everywhere. In some regions a lot has already been done to ease monetary policy ... look at the United States," Strauss-Kahn said.

(Editing by Eric Walsh)