(Adds comment from European officials, details)
Of DOW JONES NEWSWIRES
TORONTO -(Dow Jones)- U.S. Treasury Secretary Timothy Geithner on Saturday called on the Group of 20 leaders summit to focus fundamentally on strengthening growth prospects both in the near and mid term, warning of the risk to the fragile global recovery of withdrawing stimulus too soon.
The issue is expected to dominate discussions at the G-20 this weekend as Europeans, fearful of contagion from the Greek sovereign-debt crisis smothering already-weak growth, are urgently targeting austerity measures to curb growing deficits.
The U.S. Treasury secretary also cautioned members against dragging their feet on financial system restructuring, saying that markets would penalize uncertainty. In Europe, traders have targeted sovereign debt, raising the cost of government borrowing and increasing the risk of creating a much broader and deeper financial crisis in Europe. Still, he was confident that leaders would be able to approve new globally coordinated financial restructuring rules, in particular, bank capital standards, by the November leaders summit in South Korea.
Geithner said that while the global economy was coming out of the fires of the crisis, "the scars of this crisis are still with us."
"So, this Summit must be fundamentally about growth," he said, adding, "and our challenge, as the G-20, is that we all need to act to strengthen the prospects for growth."
The U.S. Treasury secretary said there are historically two major mistakes that precipitate economic crises and that can be "extremely devastating." One is being too slow to react, which some economists say exacerbated the current crisis in Europe.
"Another mistake that some governments have made over time...is to step back too quickly, in the hope that it's over," Geithner said. "What we want to do is to continue to emphasize that we're going to avoid that mistake."
The G-20 needs to act to encourage growth both through fiscal restructuring, but also by repairing the financial system, the Treasury secretary said.
"The role of government is to create the conditions for the private sector to invest and grow," Geithner said. Leaders needed to carefully balance "the requirements of future growth, including fiscal sustainability, even as you confront the immediate challenge of lifting an economy out of crisis."
At the Group of Eight leading nations summit in the Muskoka resort region, about 135 miles north of Toronto, leaders played down the divisiveness of some economic issues among countries in the weeks leading up to the G-8 and G-20 summits.
But there are still fundamental divisions over both the pace of withdrawal from stimulus in the near term and the crafting of new bank capital standards. German Finance Minister Wolfgang Schaeuble said in an editorial Saturday that Washington's fears are "unfounded."
The U.S. believes countries without severe debt problems should maintain a good measure of stimulus next year to foster growth, particularly in Europe's economic drivers, Germany and France. Europeans, fearing adding to their deficit problems, are focusing on austerity measures and want to reduce spending at a faster rate. Washington is concerned that cutting spending too fast could smother Europe's already-weak growth, adding to the global imbalances.
In prepared comments for a press briefing, Geithner tried to inspire the G-20 by pointing to the success of last year's leaders summit, which wrought strong, coordinated stimulus policy that propelled the economy out of a major global recession.
"Instead of turning inward, and allowing political division to overcome our broader responsibilities to the world economy, we acted together with a common strategy," he said.
Geithner recognized that creating those prospects for growth would require different strategies in different countries, especially given that nations were coming out of the crisis at different speeds.
In the U.S., while the country was just about to pass the peak amount of stimulus injection into the economy, the administration still believes it is important to put into place a targeted set of support such as tax breaks for small businesses, state aid and spurring employment in education.
But, he called on coordinated response. "We need to act together to strengthen the recovery and finish the job of repairing the damage of the crisis," he said.
While Geithner said the recovery is led by very strong growth in the emerging economies and a solid expansion in the U.S., he noted that growth in Europe and Japan is projected be somewhat slower "and is still excessively dependent on exports to the rest of the world."
"It's fair to say, I don't think you've seen from those countries a set of policies that give everyone confidence that you're going to see stronger domestic demand growth," Geithner said later in the press briefing.
Officials preparing the G-20's draft communique summarizing this weekend's summit have agreed that the halving of budget deficits by 2013 is an acceptable interim target, European Union Commission President Jose Manuel Barroso said later Saturday.
EU Council President Herman van Rompuy said the proposal vindicates the overall European progress toward deficit reduction. He pointed out that the average budget deficit in the EU this year is around 6% of gross domestic product, and that halving this would reduce the average deficit to the maximum level allowed by the EU's Stability and Growth Pact.
The U.S. Treasury secretary also warned G-20 members of the risks of not moving ahead to restructure the financial system, the core of which is establishing new capital standards.
Pointing to the recapitalization of U.S. banks in the wake of the financial crisis two years ago, and new capital standards in the financial regulatory legislation expected soon to be approved in Congress, Geithner said he would try to pull the world's capital standards up to the U.S. mandate.
"The test of this consensus will be whether we are able to get the world to embrace a sufficiently ambitious, sufficiently strong set of standards that will apply to all the major global financial institutions in all the major global financial centers," he said.
The secretary said he would seek to implement a stringent set of standards, but phase them in over time to prevent curbing the recovery.
Many European governments rely largely on their domestic banks for their capital flows, and forcing a recapitalization while instituting austerity measures could slow growth and potentially stall the global recovery.
(Geoffrey T. Smith contributed to this article.)
Copyright 2009 Dow Jones Newswires
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