The Group of Seven finance ministers agree the world economy is entering a dangerous new phase as the recovery fizzles out. But they now must strike a delicate balance, as countries strive to achieve much-needed austerity measures without suffocating future growth.
While G7 officials worked together Friday to restore confidence in their crisis-fighting efforts, stocks plunged globally amid rising fears of an imminent Greek debt default and growing worries about the possibility of another European bank crisis.
Toronto's benchmark index sank 2.3 per cent and the S&P 500 dropped 2.7 per cent as bank stocks in North America and Europe were hard hit. U.S. 10-year bond yields hit a record low of 1.92 per cent as investors scrambled for safety.
"We find ourselves with new challenges to the global economy," said French finance minister François Baroin at a late-night press conference in Marseille. "There are clear signs of a slowdown in global growth."
"We are taking strong actions to maintain financial stability, restore confidence and support growth," said a G7 statement.
But Mr. Baroin said there's no simple fix.
"We have to implement our fiscal restructuring plans and try to stimulate our economies – there is no one silver bullet," he said. "We are looking for smaller deficits but need to nurture growth."
Worries about Europe mounted when European Central Bank chief economist Juergen Stark abruptly resigned Friday, triggering concerns about policy makers' efforts to stabilize the financial system. Mr. Stark has been an outspoken critic of the ECB's controversial bond-purchase program, a key tool in the central bank's strategy to contain the financial crisis.
The cost of insuring Greek debt hit a new record, reaching levels that suggest a 92-per-cent chance that Athens will not meet its debt commitments.
Greece's finance minister, Evangelos Venizelos, was forced to counter speculation that Greece would default.
"It is not the first time that an organized wave of 'rumours' about Greece going bankrupt emerges," he said in a statement. "It is a game in bad taste, an organized speculation against the euro and the euro zone as a whole."
The Greek statement came shortly after the government of German chancellor Angela Merkel moved to set plans to shore up Germany's banks if Greece fails to negotiate the terms for its new bailout package, according to several reports.
Germany is taking an increasingly tough stance against Greece, threatening to withhold bailout assistance if its austerity program loses momentum. Severe spending reductions are exacerbating Greece's economic tailspin, which registered an annualized 7.3-per-cent retreat in the second quarter. Growth in the broader euro zone is also slowing; even traditional powerhouse Germany is expected to contract later this year.
Canadian finance minister Jim Flaherty on Friday raised the spectre of Greece leaving the euro zone unless it pushes forward with its severe and highly unpopular austerity program.
Mr. Flaherty urged the European countries to stick with their deficit-crunching efforts.
"It's necessary for the Greek government to stay the course," he said. "You know, the alternative is probably that they'd leave the euro. Given those two choices, I expect that the Greek government would want to continue with their fiscal consolidation plans."
The United States has decided to pump more stimulus into the economy through massive job creation programs and possibly another round of quantitative easing, putting debt reduction on the back burner. Canada, Britain and Germany are united in insisting that severe austerity programs remain in place, even if it means stalling the recovery.
Other European countries, and the International Monetary Fund are somewhere in the middle. Ahead of the Marseille meeting, Christine Lagarde, the IMF's new managing director, said that "heightened risk means a heightened readiness to respond, particularly if it looks like the economy is headed for a prolonged period of weak growth and high unemployment."