GLOBAL POLICYMAKERS have clashed over their individual prescriptions for economic recovery, with Europe demanding lower budget deficits while US officials call for demand-led growth.

At a weekend meeting of the Group of 20 (G20) finance chiefs in Busan, South Korea, US treasury secretary Timothy Geithner said the world cannot again bank on the cash-strapped US consumer to drive growth and urged other nations to stimulate their own demand.

However, European Central Bank (ECB) president Jean-Claude Trichet said fiscal tightening in “old industrialised economies” would aid the expansion by shoring up investor confidence.

British chancellor of the exchequer George Osborne will this week follow moves enacted in Ireland last year by announcing details of a review of government spending, as he seeks to cut Britain’s record deficit.

Mr Osborne is seeking support for cuts that will be the deepest since Margaret Thatcher was prime minister in the 1980s and will last longer than any other cuts since the second World War.

German chancellor Angela Merkel said yesterday that Germany was poised for a “decisive” round of budget cuts that will shape government policy for years to come. Speaking at the start of two days of cabinet talks called to identify annual savings of €10 billion, Dr Merkel said Europe’s debt crisis underscored the need to ensure the euro’s stability.

Both the fiscal tightening strategy favoured in Europe and the demand-led growth strategy espoused by Mr Geithner carry threats for the global rebound, which the G20 said faces “significant challenges”.

Continued stimulus risks bondholder revolt over rising debt burdens, while spending cutbacks could worsen unemployment. Relying on exports leaves the world prone to trade wars and competitive currency devaluations as countries seek to give their companies an edge.

“The world may end up in a period of sub-potential growth for two or three years,” said Venkatraman Anantha-Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer in Singapore. “We need to accept that all of us cannot simultaneously grow our way out of trouble.”

The fragility of the recovery from last year’s worldwide recession was evident as the G20’s finance ministers and central bankers gathered to shape the agenda for this month’s summit of their leaders in Toronto.

G20 officials signalled deeper concern about the economic and fiscal outlooks than when they last met in April. In a statement released after their talks on Saturday, they promised to “safeguard recovery”, yet replaced an endorsement of budget stimulus with a pledge to pursue “credible, growth-friendly measures to deliver fiscal sustainability”.

Officials separately targeted a deadline of November to design new rules to raise the quality and quantity of capital held by banks and December 2012 to introduce them. Mr Osborne was among those to say the process for enactment may be extended. A European and US proposal to tax banks globally to cover the cost of bailouts was defeated.– (Bloomberg)