ECB advocates fiscal tightening as Geithner seeks demand growth

European Central Bank President Jean-Claude Trichet said tightening fiscal policy was the best way for Europe to help the global economy as US Treasury Secretary Timothy F Geithner urged it to buttress weak demand.

The impact of fiscal retrenchment “on growth could not be considered negative because it would improve confidence,” Trichet told reporters on Saturday after meeting with Group of 20 finance chiefs in Busan, South Korea. The need for such action is clear in “old industrialised economies,” he said.

The remarks underline determination within the 16-nation euro area to trim budget deficits in the wake a sovereign debt crisis that has led to a euro 750 billion ($901 billion) rescue fund for the region’s weakest members. The emphasis contrasts with the message delivered at the G-20 by the US, which wants countries with trade surpluses, including China and Germany, to stoke demand to help sustain the global recovery.

The world economy requires “stronger domestic demand growth in Japan and in the European surplus countries,” Geithner said at a separate press briefing in Busan. “Europe’s biggest priority” must be to implement its plan to contain the debt crisis, adding that “people want to see” the program implemented as parliaments finish ratifying it in coming days, he said.

The G-20 governments, which oversee 85 percent of global output, are seeking to balance deficit reduction with the need to foster recovery after allowing budget shortfalls to rise to record levels last year to counter the worst recession since the Great Depression.

G-20 pledge
G-20 finance ministers and central bank governors said in their joint statement after concluding a two-day gathering in Busan that “within their capacity, countries will expand domestic sources of growth.”

Concerns about the ability of Greece, Spain and Portugal to repay public debts have pushed down the value of the euro, helping the region’s exporters. The single currency yesterday touched $1.1956, its lowest level since 2006, and has depreciated 16 per cent since the year began.

European Economic and Monetary Commissioner Olli Rehn said that he expected G-20 leaders to coordinate the withdrawal of fiscal stimulus on a global level when they meet in Toronto later this month. European Union members have agreed to start deficit reduction by 2011 at the latest, he said.