Europe to call on Japan, U.S. to consolidate public finances

MOSCOW Fri Feb 15, 2013 7:00am EST

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MOSCOW (Reuters) - The European Union will urge the United States and Japan on Friday to consolidate public finances over the medium term to remove what it believes is one of the main risks to the global economy now.

If Washington and Tokyo were to heed the call, it would also help solve the issue of "currency wars" -- the weakening of the U.S. dollar and the Japanese yen as a result of monetary and, in the case of Japan, also fiscal stimulus, because tighter fiscal policy would make the currencies stronger.

Finance ministers and central bank chiefs of the world's 20 biggest economies (G20) meet in Moscow on Friday and Saturday and a rebalancing of the world economy is high on the agenda.

Policies of central banks in most of the leading developed economies to pump money into their banking systems have raised the prospect of "competitive devaluations" as each country tries to boost its exports by engineering a weaker currency.

"Main downside risks to the global economy include the lack of credible medium-term fiscal consolidation plans in the US and Japan," a terms-of-reference document for European Union delegations to the G20 talks said.

Other risks included the economic slowdown in emerging market economies, the euro area sovereign debt crisis and geopolitical tensions in the Middle East and North Africa which could lead to further volatility in oil prices.

"The EU encourages the U.S. to continue its efforts to tackle entitlement reform and find new ways to increase government revenues whilst dealing with the debt ceiling and the sequestration," the document said.

"The EU also encourages Japan to adhere to its G20 commitment to medium term fiscal consolidation," it said.

The document also stressed the importance of countries with current account surpluses moving towards a more flexible exchange rate and refrain from competitive devaluation of currencies.

While the first part sentence could refer to China, which manages the exchange rate of its renminbi currency, the second could point also to Japan, which last year had a $50 billion current account surplus, even if it was less than half than a year earlier.

(Reporting By Jan Strupczewski, editing by Mike Peacock)

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