LOS CABOS, Mexico — The leaders of the world’s largest economies will say they are united behind efforts to boost growth and job creation to repair a global economy roiled by fears over the European financial crisis, according to a draft of the statement to be released Tuesday at the end of the Group of 20 annual meeting.
The proposed declaration, however, stops short of committing the nations to greater spending unless conditions worsen. The draft, which could still be modified, urges fiscal responsibility while looking to education, innovation and infrastructure investment to spur economies.
It’s far from certain, however, that the reassuring words will sooth markets whose harsh judgment of the official response to the crisis appears to be pushing Europe closer to catastrophe by the day. World stock markets remained mixed and nervous early Tuesday. But a consumer price inflation drop in Britain and word that Greece will be allowed to renegotiate its debt gave some hope for economic stimulus.
On Monday, less than 12 hours after a Greek election quelled worries that the country could make a devastating exit from the Euro, fears about Spain drove that massive economy’s borrowing costs dangerously close to the level where it would need a bailout, above 7 percent.
The draft statement by the G-20 leaders includes language that appears aimed at easing the Spanish crisis. It tries to reassure investors that Spain’s treasury won’t end up eating the costs of the up to (euro) 100 billion rescue of Spain’s banks announced this month.
“Euro area members of the G20 will take all necessary policy measures to safeguard the integrity and stability of the area … and break the feedback loop between sovereigns and banks,” the statement says.
It singles out China and Saudi Arabia for commitments to global economic well-being, lauding a Saudi pledge to keep oil prices from going too high by amping up production from its massive reserves. It praises China for a promise to move away from policies that keep its currency artificially low, giving Chinese exports a price advantage on world markets.
“We welcome Saudi Arabia’s readiness to mobilize, as necessary, existing spare capacity to ensure adequate supply,” the statement says. “We also welcome the commitment by China to allow market forces to play a larger role in determining movements” in the Chinese currency.
Germany must shoulder a large share of contributions to international bailouts of economically weaker European countries that overspent for years and, in exchange, it has been insisting on steep cutbacks from aid recipients such as Greece.
Those cutbacks have led to dramatic economic hardship for voters in Greece and other countries. A growing number of European countries have been advocating spending and growth, not austerity, and the G-20 statement appears to place the group of the world’s largest economies into that camp.
“We are united in our resolve to promote growth and jobs,” the draft says, declaring that the leaders will announce the “coordinated Los Cabos Growth and Jobs Action Plan” to achieve those goals, although the draft does not provide details of the plan.
“Strong sustainable and balanced growth remains the top priority of the G20, as it leads to higher job creation and increases the welfare of people across the world,” the statement reads.
It throws its support specifically behind greater government spending in countries that can afford it if conditions get significantly worse, saying countries with “sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand.”
The plan also hints at flexibility by asking that governments “take into account evolving economic conditions,” which could open the way for more latitude in troubled countries such as Greece.
The draft plan also says the Obama administration pledged to prevent sharp tax increases and government spending cuts from kicking in at the end of the year, as scheduled under current law, to avoid sending the U.S. into another recession.
Repeatedly, the plan stresses shoring up banking systems. It calls for a “more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance.”
As G-20 officials wrangled over last-minute changes in the wording of the statement, European leaders at the summit struggled to reassure the world that they were on the path to solving their relentless economic crisis.
The cost of bailing out Spain’s (euro) 1.1 trillion ($1.39 trillion) economy would likely outstrip current global ability, even after the International Monetary Fund announced late Monday that a round of contributions had increased its lending capacity to $456 billion, exceeding a round of pledges made in April. The countries making the biggest IMF contributions will be Japan, at $60 billion, Germany, at $54.7 billion, and China, at $43 billion. The United States is notably not contributing in the latest round.
The Spanish delegation to the G-20 bemoaned the rise in the country’s borrowing costs and said the market reaction didn’t correspond to the reality of Spain’s economic strength.
The IMF said in a staff report Monday that Europe is unlikely to conquer its budget problems without a greater focus on policies that promote growth. European governments should make it easier to hire and fire workers, simplify government regulations of the economy, and make it easier for workers to move to other European countries for jobs, the fund said, reforms could boost growth in the region by 4.5 percent over the next 5 years.
Even though the party that won Greece’s election Sunday supports the bailout and staying in the euro currency, there is lingering disagreement over the terms of the international bailout, which required harsh cutbacks in spending that many in Greece blame for widespread hardship suffered by ordinary citizens.
German Chancellor Angela Merkel has indicated that finding room for negotiation might not be so easy, saying Greece had to hold its side of the bargain and that “we have to count on Greece sticking to its commitments.”
But a European Union official on Tuesday argued that the terms of Greece’s bailout will be renegotiated because worsening economic conditions have made the old bailout agreement an “illusion”.
The official, who spoke on condition of anonymity, citing policy, said that the goals of the agreement would not be changed: They remain to reduce Greece’s debt to a level that is sustainable and to reform its economy to make it competitive. But how those goals are achieved, and over what time period, will be up for discussion.
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