Euro-zone debate dominates G8 agenda

U.S. President Barack Obama is pushing back against European austerity, setting a new tone for the debate over how best to save the euro zone as he hosts leaders from the Group of Eight industrial economies this weekend.

Mr. Obama's intervention followed a meeting with French President François Hollande, who defeated incumbent Nicolas Sarkozy two weeks ago by promising to reverse some of his predecessor's cost-cutting measures.

The arrival on the international scene of Mr. Hollande, a Socialist, will help Mr. Obama at the G8, a forum where he has been outnumbered by fiscally conservative politicians since winning the White House in 2008. The G8 includes the United States, Japan, Germany, Britain, France, Italy, Canada and Russia.

As the global economy emerged from recession in 2010, Mr. Obama argued against rushing to pay off the debts countries racked up while spending heavily to reverse the financial crisis. The U.S. President lost that argument, as countries such as Britain, Canada and Germany made narrowing their budgets through spending cuts the priority. The highlight of 2010's Group of 20 Summit in Toronto was a pledge to halve budget shortfalls by 2013.

But two years later, the mood has shifted. The global economic recovery has struggled to maintain momentum, calling into question the idea of austerity as a one-size-fits-all solution. German Chancellor Angela Merkel, the undisputed champion of fiscal discipline, suddenly finds herself isolated.

The emphasis on fiscal austerity in Europe is widely seen to have exacerbated the continent's debt crisis by sinking the weakest members of the European Union into recession and sowing political instability by triggering a social backlash.

Greeks are set to return to the polls in June after pro- and anti-austerity parties split the vote in an election earlier this month, leaving neither side strong enough to form a government. The new election is being characterized as a referendum on Greece's future as a member of the euro zone, and is feeding financial volatility. European stock markets fell every day this week.

"This is an issue of extraordinary importance not only for the people of Europe, but also to the world economy," Mr. Obama told reporters at the White House. "We're looking forward to a fruitful discussion later this evening and tomorrow with the other G8 leaders about how we can manage a responsible approach to fiscal consolidation that is coupled with a strong growth agenda."

The European debt crisis has consumed the G8's agenda. Three of the group's members – Germany, France and Italy – form the core of the 17-member euro zone. Britain, which rejected the euro, still counts the currency bloc's members as its largest trading partners. And Mr. Obama badly needs to stabilize the global economy to buttress his re-election bid this November.

Prime Minister Stephen Harper is equally intent on confronting the Europe issue. His spokesman, Andrew MacDougall, told reporters in a briefing Thursday that the Prime Minister would call on his European counterparts to "overwhelm" the problem before the region's struggles spread to the global economy.

France's Mr. Hollande arrived early to meet Mr. Obama for the first time. Other leaders were en route to the Camp David presidential retreat in Maryland for a working dinner on Friday night. Russian President Vladimir Putin opted against attending, sending Prime Minister Dmitry Medvedev in his place. The talks were scheduled to conclude late Saturday afternoon. Most of the leaders were then set to fly to Chicago for a summit of the North Atlantic Treaty Organization.

On paper, the schedule for the Camp David summit also includes talks on food security, Afghanistan, Iran sanctions and the Arab Spring.

Mr. Obama on Friday announced a $3-billion (U.S.) program that will see Monsanto Co., PepsiCo Inc. and dozens of other private companies work with the G8 and governments in Africa to boost food production. Canada said it would commit $50-million in new funding to the effort, saying the cash would be spent on nutrition research and to boost farm productivity.

Bono, the lead singer of rock band U2 who is almost as well known for his advocacy on behalf of Africa's poor, praised Mr. Obama's initiative at a conference in Washington. Yet not even the presence of one of the globe's biggest celebrities was enough to shift the focus from Europe's economic struggles.

Mr. Hollande told reporters after his meeting with Mr. Obama that he and the U.S. President believe that Greece "must" stay in the euro zone, and that "all of us must do what we can to that effect."

That message was intended as a counterpoint to the European officials, including some in Germany, who this week started speaking openly about the possibility of a Greek exit from the euro zone.

"Growth must be a priority, at the same time as we put in place some fiscal compacts to improve our finances," Mr. Hollande said.