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Friday, June 25, 2010

At G-20, Obama to push for public stimulus spending in Europe

Washington Post Staff Writer
Friday, June 25, 2010; 1:11 PM

TORONTO -- President Obama arrived for a meeting of world economic powers Friday with a number of achievements already in hand. But he will have a far more difficult time persuading European leaders to follow his wish on an issue he believes is essential to the economic recovery: the need for public stimulus spending.

In the days leading up to the meeting, Obama secured a change in China's currency policy that could benefit U.S. exports, a European commitment to improve bank transparency rules and anagreement on financial regulatory reform legislation that gives him leverage in encouraging others here to take similar steps.

But as he meets with the Group of 8 in a rural resort town north of here, Obama is appealing to European leaders not to trim back public spending in the midst of a growing debt crisis on the continent. His message has been complicated by Congress, which is blocking his own requests for new deficit spending to stimulate the economy.

Obama holds a far less optimistic view than his European counterparts over the state of the global economy, less sure that it has improved sufficiently since the group's London meeting last year to justify a broad government pullback except from those countries suffering a crush of debt.

Whether he succeeds in persuading European leaders to continue drawing on their strained public treasuries at the G-8, which will be followed over the weekend by the broader Group of 20 summit here, could help determine if the staggering recovery gains momentum in the coming months or dips back into the doldrums.

"There is a fundamental issue going into the meeting over the size and shape of the global recovery," said Edwin M. Truman, a senior fellow at the Peter G. Peterson Institute for International Economics and a former assistant Treasury secretary for international affairs. "And it's fair to say that the administration's position is not the same as those of many other countries."

Obama's message places him at odds with such allies as French President Nicolas Sarkozy and German Chancellor Angela Merkel, both of whom have announced austerity measures in recent weeks.

At home, though, Obama is having a hard time putting his money where his message is.

Facing a difficult midterm election season, Congress has approved only about a quarter of the $266 billion in "temporary recovery measures" that the president asked for in his February budget request.

"We need to act in concert for a simple reason: This crisis proved, and events continue to affirm, that our national economies are inextricably linked," Obama said Friday before departing for Canada. "I'll work with other nations not only to coordinate our financial reform efforts, but to promote global economic growth while ensuring that each nation can pursue a path that is sustainable for its own public finances."On Thursday, the Senate blocked a jobs billthat would have extended unemployment benefits and provide aid to cash-starved states, with Republicans saying the $33 billion it would have added to the deficit was too much. The White House condemned "Republican obstruction at a time of great economic challenge for our nation's families."

In his letter last week to G-20 leaders, Obama outlined his more pessimistic view of the economic recovery. He wrote that "significant weaknesses exist across G-20 economies" and warned that after working "exceptionally hard to restore growth we cannot let it falter or lose strength now."

The International Monetary Fund predicts that the U.S. economy will grow more quickly than European economies over the next few years.

But the recent debt crisis in Greece and the vulnerability of other euro-zone countries has made even fiscally secure European countries reluctant to encourage growth with additional public funds or even maintain current spending levels.

"If we don't do something to confront debt, we will be facing increased pressure in the financial markets," said a senior European diplomat in Washington, who spoke on the condition of anonymity to discuss the issue candidly. "But we also understand what President Obama is saying -- that we can't kill the slow recovery underway."

Congress's reluctance to approve Obama's spending requests, the diplomat said, shows that the United States and Europe are "facing the same problems."

"We're in a somewhat contradictory situation that we have to find our way through," the diplomat said. "In the end, it will be very much a matter of taking this country by country."

In recent weeks, Greece has slashed spending and raised taxes to qualify for an international bailout. Merkel recently proposed cutting defense and public works spending and implementing new taxes, even though Germany's deficit is a relatively safe 5 percent of its gross domestic product.

Sarkozy recently announced tens of billions of dollars in budget cuts and plans to raise the French retirement age to save money on public pensions. British Prime Minister David Cameron also moved to raise the pension age in a budget proposal this week that would also increase taxes and sharply cut government spending.

In his letter, Obama acknowledged Europe's dilemma, saying there is a "need to commit to fiscal adjustments that stabilize debt-to-GDP ratios at appropriate levels." He also warned that such "consolidation" should be done over "the medium term," citing the "consequential mistakes of the past when stimulus was too quickly withdrawn."

But senior administration officials say the United States is doing just that: stepping down quickly from its public spending over the next year. That is happening largely because the $862 billion stimulus measure passed in February 2009 is due to expire next year.

Administration officials say their efforts to encourage private-sector growth, through small-business tax breaks and other legislation, are designed to make up for the decline in stimulus spending.

The somewhat mixed U.S. message to Europeans leaders means the stimulus debate in Toronto will probably revolve around the pace of the spending retreat, European diplomats and administration officials say.

Heather Conley, director of the Europe program at the Center for Strategic and International Studies, said Obama and European leaders will seek to "differentiate those exit strategies" in the G-20's concluding statement.

"They'll come up with artful terms to suggest we're continuing to work on these issues," she said. "We haven't reached agreement."

In that way, she said, the meeting here is a prelude to the next gathering scheduled for later this year.

"This is not the summit to say, okay, we've weathered the storm," Conley said. "It's to say we're coming out of this in different places, we need to keep up the progress. And I think you're going to see the agenda developing really for the summit in South Korea in November to see if we really have weathered this European debt crisis."


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