Europe to call for U.S., Japan fiscal consolidation at G20

BRUSSELS Tue Jul 16, 2013 1:15pm BST

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BRUSSELS (Reuters) - Europe will call on Japan and the United States to cut government debt to spur global growth and be mindful of their central banks' policy on the rest of the world, a European Union document showed.

Finance ministers and central bank governors from the world's 20 biggest developing and developed economies (G20) are meeting on Friday and Saturday in Moscow to discuss ways to boost global economic growth and make it sustainable.

In a document setting out the position of the 27-nation European Union (EU) for the meeting, EU finance ministers say that the lack of an agreement on a credible medium-term fiscal consolidation plan in the U.S. was a risk to the global economy.

"Against this backdrop, the U.S. should make progress in addressing the medium- and long-term fiscal challenges it is facing as well as deal with the debt ceiling issue," the document, obtained by Reuters, said.

The United States is facing a tough debate in the next few months on where to set the limit on government borrowing. This is creating uncertainty in financial markets, undermining investor confidence and therefore seen as hurting growth.

Japan's huge public debt of more than 200 percent of GDP, although mainly held by domestic investors, is also a risk, unless Tokyo tells investors how it wants to bring it down eventually, the EU believes.

Adding to such concerns, the Bank of Japan has launched the world's most intense burst of monetary stimulus ever to beat deflation and help stagnant growth, pledging to inject about $1.4 trillion into the economy in less than two years.

Such extraordinary monetary easing, however, has the side-effect of lowering the value of the Japanese yen against other currencies, which some G20 countries believe gives Japan an unfair advantage in international trade.

The EU will ask Tokyo to address such spillover effects.

"We expect that Japan will put in place a credible medium-term fiscal consolidation plan that addresses its possible spillover effects on the domestic and foreign financial systems from its policy programme to end deflation, and implements structural reforms aimed at fostering sustainable growth," the EU terms of reference document said.

But an announcement by the U.S. Federal Reserve in June that it might withdraw its own monetary stimulus plan next year is also causing concern among G20 officials because it has led to a sharp increase in the value of the dollar.

The Fed said that if forecasts for the country's economic recovery are correct, the bank could end its $85-billion-a-month asset purchase scheme next summer, with the winding-down process due to start this year.

The G20 meeting in Moscow will discuss the issue.

"Ministers and Governors will also discuss potential spillovers from possible exits from unconventional monetary policies in some countries," the EU document said.

"Monetary policy should continue to be directed toward domestic price stability, thereby continuing to support economic recovery, in line with the respective mandates of central banks, also being mindful of unintended negative side effects stemming from extended periods of monetary easing," it said.

The EU reiterated it would also like to see all advanced G20 economies to commit to put debt on a declining path after 2016, when according to earlier agreements from 2010, public debt in these countries is supposed to stabilise.

G20 ministers are to present and review their strategies how to do that in Moscow, but it is unclear how concrete any such commitments might be.

(Reporting By Jan Strupczewski; editing by Ron Askew)

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