G8 leaders said a strengthening global economy will pave the way to cuts in the debt built up during the recession that followed the 2008 financial crisis.
Europe vowed to fight its fiscal woes with “determination,” while US President Barack Obama promised a “clear and credible” US deficit-reduction strategy. Japan was allowed to put off savings measures until its economy rebounds from the March earthquake and tsunami.
“The global recovery is gaining strength and is becoming more self-sustained,” according to a draft statement prepared for the leaders at a two-day summit that ended yesterday in Deauville, France.
Without mapping out binding targets, the leaders pledged to “remain focused on the action required to enhance the sustainability of public finances.”
The harshest economic crisis since the Great Depression drove debt in the US, Japan and the 17-nation euro region past the mark of 90 percent of GDP that economists Kenneth Rogoff and Carmen Reinhart say can weigh on long-term growth prospects.
Echoing that assessment, the Organization for Economic Cooperation and Development (OECD) on Wednesday warned that deepening holes in public finances may be a drag on the recovery. It predicted growth of 4.2 percent in the world economy this year and 4.6 percent next year.
“Downside risks remain, and -internal and external imbalances are still a concern,” the G8 draft said. “Commodity prices and their excessive volatility pose a significant headwind to the recovery.”
The draft made clear that the wider G20 — including developing countries such as China, India and Brazil — has become the principal forum for steering the world economy. The next G20 get-together is in November in Cannes, France.
That meeting will try to work out an international radar system that warns of imbalances involving current accounts and budgets, as well as currency misalignments that threaten world growth.
Oil prices reached a 31-month high of US$114.83 on May 2 as the recovery boosted fuel demand and the war in Libya cut supply by 1.5 million barrels a day, according to economists Goldman Sachs Group Inc. Oil has since dropped to US$100.49 on Thursday.
Goldman’s economists now expect oil prices to touch US$140 a barrel by the end of next year, raising an earlier forecast of US$120 a barrel, the bank said in a research note yesterday.
Fiscal woes loomed over the discussions, with Europe preparing a second aid package to save Greece from default and the OECD forecasting debt of 107 percent of GDP in the US and 218.7 percent in Japan by the end of next year.
Europe’s chiefs said they would need more time to solve the Greek debt crisis as the leaders noted the strength of the euro even amid investor concerns that Greece may be headed for default, said European diplomats who briefed reporters yesterday on condition of anonymity because the talks were private.
“We will do everything to avoid a default or credit event,” European Union President Herman van Rompuy told reporters in Deauville. “We will do everything to maintain financial stability in the euro zone.”
The G8 draft called for a “clear and credible medium-term fiscal consolidation framework” from Obama, who is bargaining with Congress over long-term deficit cuts as part of plans to raise the legal debt limit from US$14.294 trillion.