G20 leaders call for action on economy

Leaders of seven Group of 20 member countries called for decisive action to help the world economy pull away from a deep and prolonged recession in a letter to G20 president France today.

In the letter, they urged euro zone countries to act swiftly to resolve the euro zone's still expanding debt crisis and said the United States, along with other high deficit advanced economies, needs to overcome the remaining hurdles to putting its public finances on a sustainable path for the medium-term.

"For many advanced economies the path out of the deep and prolonged recession will be difficult. This will impact on growth in emerging markets, and there is more limited room for manoeuvre than in 2009," they said in the letter.

It was signed by leaders of Australia, Canada, Indonesia, Britain, Mexico, South Africa and South Korea.

Separately a European Central Bank study warned today that the euro currency project is in danger due to member states' runaway spending and the resulting sovereign debt crisis.

The study was a parting shot from ECB chief economist Juergen Stark, who resigned this month after opposing the bank's policy of buying troubled countries' bonds.

"Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU (Economic and Monetary Union) itself," the research paper said.

The report, published by the ECB but not officially endorsed by it, called for compulsory fines on states that run deficits above 3 percent of GDP and "financial receivership where adjustment programmes do not remain on track."

The European Union's new super-watchdog, the European Systemic Risk Board, warned that the knock-on effects of the debt crisis that began in Greece in 2009 had led to considerably higher risks of financial instability in Europe.

"Risks to the stability of the EU financial system have increased considerably," the ESRB said in a statement issued late yesterday.

"The high inter-connectedness in the EU financial system has led to a rapidly rising risk of significant contagion. This threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond."

The board chaired by European Central Bank President Jean-Claude Trichet, which includes central bankers, regulators and economists from around the 27-nation EU, called for "decisive and swift action" from policymakers, widely seen as being slow in the fight to contain the crisis.

It said supervisors "should coordinate efforts to strengthen bank capital, including having recourse to backstop facilities, taking also into account the need for transparent and consistent valuation of sovereign exposures".
That echoed comments by the International Monetary Fund, which called in August for a recapitalisation of European banks - a move that was fiercely criticised by bank executives and EU governments at the time.

Speaking on the eve of IMF and G20 meetings starting today in Washington, Canadian finance minister Jim Flaherty joined a chorus of non-European officials warning that a new global credit crunch could bite unless Europe tackles Greece's debt problems, the most acute in the 17-nation currency area.

"The number one thing we'll talk about tomorrow night at dinner - as we did in Marseilles with the G7 - is that Europe has to pick a lane here, they've got to deal with that issue respecting Greece," he told the Canadian Broadcasting Corp.

"Otherwise the markets will get ahead, we will have some sort of a crisis, it will become a banking crisis, it will affect banks all around the world, we could be into another credit crisis which will cause contraction in the real economy. So we've got to deal with that," he said.

Mr Flaherty said European nations could "get ahead of the game" if they were prepared to increase the euro zone's bailout funds to €1 trillion from €440 billion.

Reuters