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Measures to tackle downturn cloud G8 meeting

June 13, 2009

By Guy Dinmore in Lecce, Italy, and Ralph Atkins in Frankfurt

Published on FT on June 13 2009

Differences over the extent and transparency of bank stress tests and the timing of exit strategies overshadowed the start of a G8 finance ministers meeting in southern Italy last night.

Germany’s Peer Steinbrueck said it would be difficult to find support for a discussion on exit strategies, although Jim Flaherty, Canada’s finance minister, had earlier said the time had come to start talks on how to wind down economic stimulus measures.

“The danger of short-term deflation is minor compared to the risk of long-term inflation,” Mr Steinbrueck said on arrival in the Baroque city of Lecce.

Mr Flaherty also said before the first formal meeting that Europe had to do more in stress testing of its banks, by at least publishing their results.

“There is some resistance in Europe on stress tests. There is a tendency to look to other countries to resolve the problems,” he said, expressing a view echoed by the US.

Alistair Darling, UK chancellor, was expected to call on other European governments to act more boldly in restoring bank balance sheets.

The fragility of the eurozone’s economic recovery was underlined yesterday when official figures showed industrial production in April was 21.6 per cent lower than a year before – the steepest year-on-year fall since records began in 1991.

“Policymakers should not be in a hurry to withdraw
policy stimulus,” said Marco Annunziata, chief economist at Unicredit. Industrial production was 1.9 per cent lower in April than March, a much steeper monthly decline than economists had expected.

The potential threats facing a weakened European banking system are also worrying European policymakers. Speaking in Bulgaria, Jean-Claude Trichet,European Central Bank  president urged “rapidity of execution” in the implementation of government support schemes for the financial sector.

Mr Trichet pointed out that only 55 per cent of funds earmarked for recapitalisation had been used in the euro area. “In crisis times, rapid implementation is crucial,” he said.

Ministers are coming under market pressure to start outlining how they intend to reverse record budget deficits once the expected economic recovery takes hold.

Tim Geithner, US Treasury secretary, was scheduled to hold separate bilateral meetings last night with Russia’s Alexei Kudrin and Kaoru Yosano, his Japanese counterpart.

The US has made public its stress tests of banks. Mr Steinbrueck has said he is opposed to Europe publishing results, while France’s Christine Lagarde favours publication later this year.

The G8 ministers, joined by heads of international institutions, are expected to issue a joint declaration at close of talks this afternoon.

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