G8 finance chiefs urge caution on recovery

LECCE, Italy (AFP) – – G8 finance chiefs on Saturday warned the global economic outlook remained uncertain and risky despite “signs of stabilisation” after talks in southern Italy.

“There are signs of stabilisation in our economies… but the situation remains uncertain and significant risks remain to economic and financial stability,” ministers from the G8 leading world powers said in a statement.

“We must remain vigilant to ensure that consumer and investor confidence is fully restored and that growth is underpinned by stable financial markets and strong fundamentals,” they added at the close of two days of talks.

There were divisions however as Germany pressed governments to prepare to scale back huge deficits and spending incurred during the global economic crisis while the United States urged countries to stay the course.

Rifts also emerged over US-style “stress tests” to check on the financial stability of crisis-hit European banks, with Washington and London in favour but Berlin warning that they could undermine economic confidence.

In their statement, the ministers said they would continue to provide liquidity for banks as required and begin to prepare “exit strategies” for after the crisis, adding that these “may vary from country to country.”

They also warned unemployment could rise even if economic growth returns.

German Finance Minister Peer Steinbrueck said earlier he shared the International Monetary Fund’s view that rescue measures for economies hit by the crisis must “increasingly be combined with a credible exit strategy.”

“This means we must now think about how will go about it once we are getting out of this hole, this valley,” he said, adding that this applied to monetary and fiscal policy as well as to the rescue efforts for the banking sector.

But other countries said it was too soon to think about exiting the crisis.

“We shouldn’t get carried away with the recovery while we’re still relaunching, stimulating and ensuring that our recovery plans work,” French Finance Minister Christine Lagarde told reporters late Friday at the talks.

“We must be very prudent because the shock was extremely brutal,” she said.

US Treasury Secretary Timothy Geithner said ahead of the meeting this week that he would urge fellow finance chiefs to stay the course on economic stimulus spending and financial reforms despite signs of the crisis easing.

Meanwhile Britain warned its recovery could be delayed by other European states failing to clean up their banks.

“If there is a problem it doesnt get any better by walking around it and hoping it will go away,” British finance minister Alistair Darling told the Financial Times ahead of the talks.

“Because if you don’t sort that problem you’ll never sort out the economy.”

Signs have emerged in recent weeks of a modest start to a recovery in countries such as Britain, France, Germany, Italy and the United States.

That in turn has sparked debate over “exit strategies,” or how governments will rein in spending and cut massive debts incurred during the crisis.

Some warn however that it may be too early to declare the worst over while output in many parts of the world continues to decline and unemployment soars.

The International Monetary Fund has upped its forecast for global growth in 2010 to 2.4 percent, but the World Bank says the crisis in 2009 will be worse than expected and the WTO says there are no signs of a trade recovery yet.

The talks included ministers from all the Group of Eight (G8) countries — Britain, Canada, France, Germany, Italy, Japan, Russia and the United States. – Dow Jones Newswires contributed to this report.