World leaders weigh stimulus vs austerity at G-20

With major European economies on the brink of collapse, leaders concluding an annual Group of 20 meeting sought Tuesday to reassure the world that they would find a way to put out the debt-fueled economic wildfire that has threatened banks, wiped out jobs and toppled governments across the continent.

But the presidents and prime ministers gathered in this seaside resort seemed content to delay any major decisions for a while longer, releasing only a general statement that stopped short of committing any nations to greater spending unless conditions worsen and urging fiscal responsibility.

For months, governments and economists have weighed two different paths to ease the financial crisis- spending more to try to stimulate growth or slashing budgets. European leaders headed home without announcing any significant agreements, and they aimed to meet again later this month in Brussels, with a goal of adopting a more detailed plan.

Still, the battle lines in the stimulus-versus-austerity debate were clearly drawn among the 24 heads of state gathered in a heavily guarded convention hall lined by a moat. The conservative leaders of the United Kingdom, South Korea and Germany came out decisively for austerity, warning that budget cuts were crucial to restoring fiscal order and worldwide confidence.

“The countries in crisis will have to find measures that might be painful and politically unpopular in the short term, but nonetheless they must pursue this path,” South Korean President Lee Myung-bak said Monday.

On the other side were left-leaning governments such as those in Argentina, Brazil and France that have denounced the German-imposed austerity plan for struggling countries such as Spain and Greece and pushed for more stimulus spending.

President Barack Obama said European leaders “grasp the seriousness” of their debt crisis and are moving with a “heightened sense of urgency” to find a solution.

After the summit, Obama said the economic problems in Europe won’t be solved by the G-20 or the United States, but by European nations. He said he was confident they could do that, but acknowledged the difficulty of getting all the separate legislatures to agree.

That the leaders adopted only some general policies is typical of G-20 declarations, said Jacob Kirkegaard, a research fellow at the Washington-based Peterson Institute for International Economics.

“On the big issue of the hour, of weeks and months, the G-20 communique is not going to make a big difference,” Kirkegaard said. “The communique will repeat the mantra about strong, balanced, global growth. With each member state free to do whatever they want, that’s the way to paper over those differences.”

Indeed, the statement’s reassuring words failed to sooth troubled world stock markets, which remained mixed and nervous Tuesday.

Germany must shoulder a large share of the contributions to bail out economically weaker European countries that overspent for years. In exchange, Germany has been insisting on steep cutbacks from aid recipients such as Greece.

Those cutbacks have led to dramatic economic hardship for voters in Greece and other countries. A growing number of European countries have been advocating spending and growth, not austerity, and the G-20 statement made limited mention of such a possibility.

“We are united in our resolve to promote growth and jobs,” the document said. “Strong sustainable and balanced growth remains the top priority of the G20, as it leads to higher job creation and increases the welfare of people across the world.”

The statement threw support specifically behind greater government spending in countries that can afford it, if conditions get significantly worse. Countries with “sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand.”

The plan also hinted at flexibility by asking that governments “take into account evolving economic conditions,” which could open the way for more latitude in troubled countries such as Greece.

British Prime Minister David Cameron and French President Francois Hollande noted that the summit’s final declaration also pledges to avoid new protectionist measures until the end of 2014 and that China has agreed to let currency fluctuate more freely, according to market forces.

German Chancellor Angela Merkel repeated Tuesday that Greece has to uphold its side of the bargain.

“It’s obvious that the reforms that were agreed in the past are the right steps and that they therefore must be implemented,” she said, though she avoided directly answering the issue of giving Greece more time.

Merkel said the G-20 leaders had a “very balanced” discussion on growth, though she stressed once again that growth “is not just about money.”

“We need the right mix of budget consolidation ... and at the same time efforts for growth,” she said.

The statement said the Obama administration pledged to prevent sharp tax increases and government spending cuts from kicking in at the end of the year, as scheduled under current law, to avoid sending the U.S. into another recession.

Treasury Secretary Timothy Geithner said the U.S. was “encouraged” by European leaders’ plans to confront the continent’s economic crisis.

Speaking on the sidelines of the summit, Geither said Europe will now focus on helping Greece stay afloat, designing a more integrated financial system and improving economic growth.

“And all of us, of course, have a huge interest, a huge stake in the success of their efforts,” he said.

Repeatedly, the G-20 plan stresses shoring up banking systems. It calls for a “more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance.”

The cost of bailing out Spain’s 1.1 trillion ($1.39 trillion) economy would likely outstrip current global ability, even after the International Monetary Fund announced late Monday that a round of contributions had increased its lending capacity to $456 billion. The countries making the biggest IMF contributions will be Japan, at $60 billion; Germany, at $54.7 billion; and China, at $43 billion. The United States is notably not contributing in the latest round.

Associated Press writers Michael Weissenstein in Los Cabos, Mexico; Christopher S. Rugaber and Jim Kuhnhenn in Washington; Geir Moulson in Berlin; and Sarah DiLorenzo in Brussels contributed to this report.