MEXICO CITY – Finance chiefs of the world's leading economies are ringing alarm bells over the U.S. fiscal cliff and Europe's debt woes at a meeting in Mexico this weekend as they look to push back deficit reduction targets to help boost growth.
Unless a fractious U.S. Congress can reach a deal, about $600 billion in government spending cuts and higher taxes are set to kick in on January 1, threatening to push the American economy back into recession and hit world growth.
But with the U.S. presidential election looming on Tuesday, dealing with the fiscal cliff has been delayed.
"The Americans themselves acknowledge that this is a problem," a G20 official said on condition of anonymity. "The U.S. administration says it doesn't want to fall off the fiscal cliff, but right now it can't tell us how exactly it will address it because that issue is on ice ahead of the election."
Tax cuts, including those enacted under President George W. Bush, are set to expire in January, when automatic spending cuts designed to put pressure on lawmakers to strike a long-term budget deal are also set to kick in.
"What remains a sort of key aspect is that the United States is not respecting the current commitments (to reduce its deficits) and does not have a credible fiscal consolidation plan," one European official said.
Germany has come to the meeting calling on the United States and Japan to shoulder with Europe responsibility for ensuring global economic stability.
"The United States and Japan bear as great a responsibility for (ensuring stability) as we Europeans," German Finance Minister Wolfgang Schaeuble told Reuters ahead of the meeting.
The U.S. Congress will also soon have to raise the nation's debt limit to avoid a default.
Policy makers are scrambling to stem a new global slowdown as the economy is still limping after the 2008/9 financial crisis.
An initial consensus around the need for urgent action to prevent a new depression has given way to deep differences over issues such as spending to boost growth and the right pace of belt-tightening to tackle high debt levels.
The International Monetary Fund last month cut its forecast for global growth to 3.6 percent for 2013, citing "familiar" forces dragging on advanced economies: fiscal consolidation and a weak financial system.
Even Germany, which powered through the first two years of the euro zone debt crisis, has cut its growth forecast to just 1 percent for next year and countries such as Spain and Italy are already back in recession.
Jose Angel Gurria, head of the Organization for Economic Co-operation and Development, said on Saturday the G20 should appeal to the United States to avoid the` fiscal cliff, but added he was optimistic that Congress would strike a deal.
"I still believe it is not going to be applied," Gurria said in an interview before the meeting of G20 finance chiefs, which formally starts on Sunday.
Officials are also concerned about Japan's own version of the fiscal cliff, a crippling funding shortfall just as it risks sliding into recession, and recognize that previous commitments made by developed countries to cut their budget deficits in half by 2013 look unfeasible.
U.S. and European officials are also likely to come under pressure from G20 peers for dragging their feet on implementing the so-called Basel III accords on financial regulations, the world's response to the 2007-09 financial crisis.
Countries who fail to introduce the rules, which are aimed at safeguarding the global banking system from another financial crisis, could face sanctions, a senior Mexican finance official said.
Despite the issue's prominence, a G20 source said Russia wants to keep financial regulation discussions at a more technical level when it takes over the presidency of the group from Mexico after this meeting, which ends on Monday, possibly pushing the issue onto the back burner.
With several heavyweights like U.S. Treasury Secretary Timothy Geithner - who is expected to stand down soon after the U.S. elections on Tuesday - European Central Bank chief Mario Draghi and top Chinese officials skipping the meeting, few expect any major agreements.
Spain's reluctance to seek financial aid is stoking worries that Europe's debt crisis could further hurt world growth. The government is under pressure to seek a bailout as it struggles to cope with high public debt and the cost of recapitalizing its banks. Euro zone sources say they expect Spain to seek financial aid from the euro zone in November.
A government source told Reuters on Wednesday that Prime Minister Mariano Rajoy had not ruled out applying for a rescue, but Rajoy has signaled he will not rush unless market conditions deteriorate significantly.
(Reporting by Alonso Soto, Alexandra Alper, Tetsushi Kajimoto, Lesley Wroughton, Julien Toyer, Jan Strupczewski, Gernot Heller, Louise Egan, Krista Hughes, Dave Graham and Michael O'Boyle; Writing by Simon Gardner; Editing by Doina Chiacu and David Gregorio)