Leaders warn recovery could falter without help

DAVOS, Switzerland (Reuters) - World leaders and policymakers in Davos are nervous the global recovery could falter, especially if governments withdraw support too quickly.

The recovery is “a mile wide but only an inch deep” and job creation very tentative, Canada’s Prime Minister Stephen Harper told the World Economic Forum in Davos. He urged governments to keep economic support programs in place.

China’s Vice Premier Li Keqiang said there were “twists and turns” ahead and vowed that China would maintain stable policies.

“There still remain many uncertainties in (the) domestic and external economic environment,” said Li, the man tipped to become China’s next premier.

“To tackle these problems, we will keep continuity and stability of our macroeconomic policies, continue to follow proactive fiscal policy and moderately easy monetary policy,” he said.

Markets were roiled this week on concerns China was tightening credit too quickly, which could upset a global recovery driven largely by rapid growth in Asia. He sent a reassuring message that China would not seek to upset recovery.

South Korean President Lee Myung-bak, who heads the G20 this year, also urged member countries to tread gently as they begin to unwind extraordinary monetary stimulus measures.

So far, Australia is the only major economy to have raised interest rates. Other central banks have started to withdraw the billions of dollars in extra cash pumped into the financial system to prevent a freeze-up and economic collapse.

The International Monetary Fund, the policeman for the world economy, said it is best to go easy. “Don’t exit too early, think about the long term,” John Lipsky, First Deputy Managing Director of the International Monetary Fund, told Reuters.

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The speed of recovery varies greatly around the world, he said. The IMF this week raised its growth forecasts to a brisk 3.9 percent for 2010 after 0.8 percent contraction last year. But it comes thanks to the success of economic and monetary stimulus programs estimated to have cost at least $5 trillion.

Jaime Caruana, the head of the Bank for International Settlements, warned pulling out too soon risked potentially dangerous distortions in competition.

“It’s a narrow path,” Caruana, told Reuters, arguing for a move “neither too early nor too late.”


Greece has brought the dangers of the aftermath of the credit crisis into sharp focus. Its budget deficit has ballooned and the premium on its government bonds reached a new record on Thursday on investor worries it cannot repay its debt, which would strain the resiliency of the euro zone.

Both Greek Prime Minister George Papandreou and Spain’s Jose Luis Zapatero, whose country holds the European Union presidency, sought to dampen these concerns.

“No one is going to be leaving the euro, more countries are going to be joining,” Zapatero told the forum, adding that was the “best proof” of the project’s success.

“The euro club is a strong club with strong ties and reciprocal support -- let no one be mistaken.”

China's Vice-Premier Li Keqiang attends a session at the World Economic Forum (WEF) in Davos, January 28, 2010. REUTERS/Christian Hartmann

Papandreou said his country was being targeted as a “weak link” but would be responsible for putting its house in order, with euro zone restraints helping to create discipline.

Business leaders joined the call for fiscal discipline as an important element in restoring sustainable growth.

“We have shamelessly borrowed from our children. And we used it, we didn’t invest it. That’s the picture we’re in,” said Ben Verwaayen, Chief Executive of Alcatel-Lucent.

Pressure was also growing on government commitments to conclude trade liberalization talks this year, though trade negotiators remained skeptical of political will to overcome hurdles including U.S. elections later this year.

Korea’s Lee Myung-bak said concluding the Doha round before the end of 2010 “should be given the highest priority.”

However Pascal Lamy, director-general of the WTO, told reporters it was too early to tell whether leaders of the main economies would make good on their commitment.


Earlier, Wall Street executives attending the forum welcomed U.S. President Barack Obama’s plan to create jobs and a softening of his attack on banks in his State of the Union address, but questioned whether the proposals would become law.

Obama pushed job creation to the top of his agenda in his annual speech to Congress and vowed not to abandon his struggling healthcare overhaul after the loss of a key Senate seat in Massachusetts raised doubts about his leadership.

“The market is probably relieved that he didn’t come out with some other nuclear attack on Wall Street,” John Studzinski, global head of the advisory group at Blackstone said.

Tom Donahue, President of the U.S. Chamber of Commerce, said he welcomed the job moves and the fact Obama had adopted some of the initiatives promoted by his organization, including doubling exports in five years with the help of a push for improved trade agreements and changes in export control rules.

“I think it is a recognition that everybody is getting down to the reality (that) what keeps people happy or not happy, what is going to get us out of the recession or not, what is going to address the deficit or not is jobs, jobs and jobs,” he said.

Additional reporting by Paul Taylor, Natsuko Waki and Ben Hirschler; Writing by Clara Ferreira Marques; Paul Taylor and Stella Dawson; editing by Jon Boyle