DIFFERENCES OVER bank stress tests and the timing of exit strategies from government measures to deal with the recession overshadowed the start of a G8 finance ministers meeting in southern Italy last night.
Germany’s Peer Steinbrück 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 Steinbrück 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 of the exchequer, was expected to call on other European governments to act more boldly in restoring bank balance sheets.
The fragility of the euro zone’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.
“Policy-makers 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 policy-makers. 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.
Ministers are coming under 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 Alexei Kudrin and Kaoru Yosano, his Russian and Japanese counterparts.
The US has made public its stress tests of banks. Mr Steinbrück has said he is opposed to Europe publishing results.
The G8 ministers, joined by heads of international institutions, are expected to issue a joint declaration at the close of talks this afternoon.
