Leaders play down austerity split on eve of G20

HUNTSVILLE, Ontario (Reuters) - The world's richest economies, burdened with debt after spending their way out of the credit crisis, papered over differences on Friday on how to clean up their finances with minimal damage to growth.

Leaders from the Group of Eight, a club that spans the large industrialized nations and Russia, met in Canada ahead of a broader summit with China and other rising economic powers of the G20, now the world's dominant economic policy forum.

Washington appeared to be at loggerheads with Berlin in the run-up to the Canada summits. U.S. officials expressed concerns that a nascent recovery from the global recession could be derailed by accelerating austerity in much of Western Europe.

German Chancellor Angela Merkel said, however, that the G8 talks had not produced any conflict over economic policy.

"The discussion was not controversial but was based on great mutual understanding," she told reporters.

A U.S. official said: "There is a broad consensus among the G8 leaders, a convergence of views...about how to maintain durable growth while also reaffirming, of course, the common shared commitments to fiscal consolidation going forward."

The G20 has struggled to keep the unity of last year when governments pumped trillions of dollars into the economy to prevent recession turning into depression and vowed to prevent another credit crisis from endangering the world economy.

U.S. President Barack Obama, buoyed by a deal in the U.S. Congress to toughen rules for Wall Street, urged other G20 leaders to make good on promises to curb risky bank behavior that sparked the financial crisis in 2007.

"We need to act in concert for a simple reason: this crisis proved, and events continue to affirm, that our national economies are inextricably linked," Obama said, calling on other leaders to match the U.S. progress on financial reform.

SURGING DEBT BURDEN

Burdened by surging debt, G8 leaders on Friday focused on the estimated $18 billion shortfall on their 2005 pledge to raise aid for the world's poorest countries by at least $50 billion by 2010.

As rich economies slowly heal, helped by strong Asian growth and demand, disagreements over the next steps in the response to the crisis have unsettled investors who fear that a splintering of policy could undermine recovery.

"The cohesion generally evident among policymakers in dealing with the global crisis is in danger of giving way to a more divisive debate about how to manage the recovery," Credit Agricole analysts said in a note to clients.

Canadian Finance Minister Jim Flaherty said he was cautiously optimistic the G20 could reach an agreement on targets for cutting their budget deficits.

Obama, concerned that the recovery is tenuous, faces high U.S. unemployment and the possible loss of his party's control of Congress in elections in November and he has been reluctant to adopt spending cuts to curb the deficit.

British leader David Cameron, whose government unveiled an austere budget this week, said smoothing out imbalances between export-rich countries and debt-laden consumer nations would require belt-tightening by America too.

"Part of dealing with the imbalances is for the worst deficit countries to roll up their sleeves, get on with the job and make sure they are living within their means," he said.

The G20 pledged last year to coordinate a string of banking reforms by the end of 2012. Obama can boast he is meeting the bulk of those commitments. Europe has yet to come up with comprehensive rules for financial reform.

Canada and Japan, whose banks fared better during the financial crisis, say some G20 reform unfairly punish their banks that did not contribute to the upheaval.

Japanese Prime Minister Naoto Kan said the reform debate should take into consideration each country's situation.

Merkel, who along with her peers from Britain and France is to press for bank taxes more globally, acknowledged that things were "not looking so good" on that front.

SECURING RECOVERY

Other G20 conflict zones include trade and China's yuan currency.

While economic recovery has taken hold across the industrialized world, Greece's debt troubles -- it was rescued by fellow euro zone countries -- have thrust a spotlight on ragged government finances in many rich nations.

The aggregate debt of the rich G20 countries is expected to hit 107.7 percent of GDP this year, almost three times the 37 percent debt forecast for emerging market economies of the G20 and up from 80.2 percent at the outset of the crisis in 2007, according to the International Monetary Fund.

Germany and Britain say fiscal health breeds confidence and growth, but the United States, with a deficit at the highest level since World War Two, has warned the recovery may not be robust enough to withstand a simultaneous drawdown in public support.

The United States, Europe and Asia are all banking on exports to try to make up for sluggish demand at home, setting up conflicts over trade and currency exchange rates.

Washington wants countries with trade surpluses, like China, Germany and Japan, to buy more at home. But those countries are also counting on exports to lift growth.

China seemed to defuse some of the G20 trade tension last weekend when it unexpectedly said it would ease its grip on the tightly managed yuan currency. But some economists have questioned whether the move was anything more than symbolic.

"China needs to stop giving us the runaround and deliver real change," Nobel-winning economist Paul Krugman wrote in the New York Times.

Around 2,000 anti-G20 demonstrators marched to within a couple of blocks of U.S. consulate in Toronto before they were halted by riot police. At least one person was arrested.

Should the G20 need a moment of levity, it has the soccer World Cup in South Africa.

Asked if he and Merkel would watch England play Germany on Sunday, Britain's Cameron said: "There is an idea we might try and watch it together. I will try not to wrestle her to the ground during penalties, but we will have to see."

(Additional reporting by Claire Sibboney, Louise Egan, Huw Jones, Lesley Wroughton, Sumeet Desai, Chisa Fujioka, Reuters G20 team; Writing by Emily Kaiser and Brian Love; Editing by William Schomberg and David Storey)