THE GROUP of Eight (G8) nations have begun considering how to reverse the emergency steps they took to rescue the world economy as it shows signs of recovery.

As they delivered their most upbeat outlook since US bank Lehman Brothers collapsed in September, G8 finance ministers meeting in Italy over the weekend said that they will start planning exit strategies for when sustainable growth returns.

They said it was still too soon to roll back on budget deficits and bank bailouts after the meeting.

“We discussed the need to prepare appropriate strategies for unwinding the extraordinary policy measures taken to respond to the crisis once the recovery is assured,” the ministers said in a statement. There are “signs of stabilisation”, they said, although “the situation remains uncertain”.

Governments are under pressure to turn their attention from fighting recession to smoothing a recovery as investors worry that more than $2 trillion in stimulus programmes will spark inflation if left unchecked. The officials bickered over whether Europe is endangering a rebound by refusing to impose stricter health checks on banks.

Financial markets may take the G8 finance ministers’ first hints of a move out of crisis mode as a sign the economy has turned the corner – and that is exactly what some policymakers may be worried about.

The differences that emerged, just weeks after the world’s top countries showed a united front at London’s G20, underline the varying pace of recovery among economies and the extent of the risks that still face some governments.

Europe is divided on publishing bank stress tests, there was no sign at all of progress on financial regulation, and the UK and US were left moving swiftly at the end of the meeting to try to rein in the idea that recovery may soon be assured.

“There was an implicit split between the US and UK on one hand and Europe on the other over the pace of unwinding [crisis measures],” said Simon Derrick, head of currency research at Bank of New York Mellon in London. “The US and the UK were saying it’s too early to talk about when.”

Germany and Canada led the push for ministers to tackle the problem of how to start rolling back massive state spending and increasing interest rates, to ensure the crisis is not followed by a surge in inflation and a fiscal blowout.

“The issue is to act in time to prevent any inflationary developments playing a major role,” German finance minister Peer Steinbrück said.

“All of the G8 are aware of the risks for the capital markets.”

A surge in long-term government bond yields over the past several weeks showed investors worried about the impact of huge sums poured into economies and some analysts said bond markets would take heart at hints that nations may cap new borrowing.

US treasury secretary Timothy Geithner was among those voicing the most caution, urging his counterparts not to read too much into the initial “green shoots” of recovery and that it was too soon to begin withdrawing stimulus policies.

Governments should keep their foot on the accelerator until clearer signs of recovery are more firmly established, he said.

“I don’t think we’re at the point yet where we have a recovery in place,” he said.

“What you can say is, that the force of policy actions that have been put in place and in the pipeline have brought about a very important reduction in concern about the prospects of a deep recession globally.”

A survey by accountants Ernst & Young found 88 per cent of global firms said their operating model had been altered by recession, while 78 of 100 Irish companies said the economic downturn had been far worse than anticipated. – (Reuters, Bloomberg)