/www.bloomberg.com/ By Katrin Bennhold and Gregory Viscusi
Paris, (Bloomberg) -- The Group of Seven major industrial nations split over the Bush administration's proposed $690 billion in tax cuts as France and Italy said they will spur growth and the head of the European Central Bank criticized the U.S. for widening its budget deficit.
``It is a cause of concern for Europe and the world that the situation of twin deficits seems to be re-emerging,'' ECB President Wim Duisenberg told reporters, referring to the U.S. trade gap and the budget shortfall.
G-7 nations, already divided on whether to attack Iraq, have pursued different policies to promote economic expansion. The U.S., Japan and France are cutting taxes, while Germany and Britain are raising them. U.S. Treasury Secretary John Snow defended the planned cuts, which U.S. Democrats say will undermine the economy by widening the deficit.
``There's a major difference between a deficit in a period of full employment and a deficit in a period when the American economy isn't fully employed,'' said Snow, in his first appearance at a G-7 meeting. ``Current deficits are quite modest in comparison with the size of the U.S. economy, under 3 percent and declining.''
French Finance Minister Francis Mer and Italy's central bank governor, Antonio Fazio, backed Snow. Two days of talks in Paris among finance ministers and central bankers of the seven nations also saw disagreements among Europeans about interest rates.
Duisenberg said he no longer predicts an economic recovery in the euro region this year, signaling he may back a rate cut as soon as March. The ECB lowered its benchmark rate by a half point in December to 2.75 percent, the first reduction in a year. Fazio said he doubted whether that would boost growth.
`Keeping it Vague'
Ministers barely discussed currencies, brushing aside complaints from European companies including Siemens AG and Pechiney SA that the euro's 24 percent rise against the dollar in the past 12 months is hurting sales. German Finance Minister Hans Eichel said a stronger euro will keep inflation tame.
The final 1 1/2 page communique papered over those differences. The G-7 pledged to counter any further weakening of the world economy. European ministers said they are committed to making labor and product markets more flexible. Japan promised to overhaul its financial-services industry. The U.S. said it will boost job creation, productivity, and savings.
``They are keeping it vague,'' said Lorenzo Codogno, an economist at Bank of America in London. ``It's like restating the obvious, but there isn't much else they can do.''
The G-7 comprises the U.S., Japan, France, Germany, the U.K., Italy and Canada. They grew a combined 1.3 percent in 2002 and 0.6 percent in 2001, the worst two-year showing since the mid-1970s, according to the Organization for Economic Cooperation and Development.
Prepared to Respond
The euro region's economy may shrink this quarter and grow 1.8 percent this year, the European Union predicts. U.S. gross domestic product will rise 2.7 percent this year, this month's consensus forecast of 53 analysts surveyed by Blue Chip Economic Indicators said. Japan's economy will grow 0.6 percent in the year beginning April 1, the government estimates.
``If the economic outlook weakens we are prepared to respond as appropriate,'' G-7 said in their statement.
The pledge to cooperate was overshadowed by earlier comments criticizing Bush's third planned tax package in two years, saying it may widen the budget and trade deficits. The U.S. Treasury predicts the reductions will help accelerate economic growth to 3.3 percent this year from 2.4 percent in 2002, and create 1.5 million jobs by 2005.
``Large twin deficits may create sustainability risks, which in case they materialize, would have significant ramifications well beyond the U.S.,'' said Nikos Christodoulakis, the economy minister of Greece, which holds the rotating presidency of the European Union.
France Backs Snow
The U.S. government predicts the budget deficit will reach a record $307 billion, or 2.7 percent of gross domestic product, next year and the trade deficit reached an unprecedented $44.2 billion in December. Snow has said world growth will close the trade deficit and that the budget gap is ``manageable.''
Snow's tax cuts received backing elsewhere. France's Mer, who has enacted tax cuts of his own worth 3.9 billion euros ($4.2 billion), said he agreed with the U.S. that ``it's not when things are going badly that you introduce rigorous policy.''
Germany's Eichel said the world economy will benefit from faster growth in the U.S. At the same time, ``one has to have a few worries about the twin deficits of the U.S.,'' he told a press conference.
Fazio, Italy's central bank governor, said the U.S. ``is such a huge and productive economy'' that it can overcome the deficits.
The U.S. Federal Reserve has reduced its overnight bank lending rate a dozen times since January 2001 to a 41-year low of 1.25 percent. The ECB has cut only five times in the same period, to 2.75 percent. The Bank of England lowered its benchmark rate to 3.75 percent last week, the lowest since 1955.
Iraq in Background
The communique didn't refer directly to the standoff over Iraq, just mentioning ``geopolitical uncertainties.'' Chief executives of companies such as DuPont Co. have said that war tensions are a major obstacle to business and consumer spending.
``Obviously the issue of Iraq was the background,'' said Bank of England Governor Edward George.
A war in the Persian Gulf region may cut global expansion in half from last year, an official of the International Monetary Fund said this week. Growth may slow to as little as 1.5 percent this year, from 3 percent in 2002, said Rogerio Zandamela, the lender's representative in Brazil.
Exchange Rates
The statement didn't single out the yen, euro or dollar's movements, and included the same broad reference to currencies made at other G-7 meetings. Officials will ``continue to monitor exchange markets closely and cooperate as appropriate,'' the statement said.
``There wasn't specific discussion of exchange rates,'' Fazio said. Speaking to journalists, Snow reiterated that the U.S. is in favor of a ``strong dollar.'' Eichel and Mer said they aren't concerned about the increase in the value of the euro.
European companies lament the euro's rise. Reinhart Siewert, chief executive of Koenig & Bauer AG, a German maker of printing machines, would have liked G-7 ministers to ``do something about the euro.'' Koenig & Bauer gets 80 percent of its sales abroad.
The euro's gain may lead to a ``further damping'' of growth, Duisenberg said. Exports account for about a quarter of the euro region's gross domestic product.