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Finance Minister Jim Flaherty (GEOFF ROBINS/Geoff Robins/Reuters)
Finance Minister Jim Flaherty (GEOFF ROBINS/Geoff Robins/Reuters)

Europe debt crisis shows rifts in G20 Add to ...

The European debt crisis may not be having much effect on Canada's economy, but it is creating chasms in the Group of 20 that could complicate Prime Minister Stephen Harper's efforts to forge a united front on how to secure the global recovery.

Speaking in Toronto on Thursday as leaders from around the world were set to arrive in Canada, Finance Minister Jim Flaherty acknowledged the gulf that has emerged in recent days between countries such as Germany and Britain, which have pledged deeper budget cuts than what Canada is proposing, and countries such as the United States, where President Barack Obama is urging colleagues to be careful about withdrawing stimulus too quickly.

"That's not a settled matter," Mr. Flaherty told reporters in response to a question about whether the targets might end up being stricter than what Canada has proposed. However, he said, while "different countries are in different fiscal situations," there are not, "at the end of the day, any divisions with respect to the need for fiscal consolidation."

Canadian officials have sought to play down differences among G20 members, saying it's a given that contributions to "sustainable, balanced growth" for the global economy as a whole will vary across nations, depending on whether they are countries that have staggering budget shortfalls that need to be addressed as quickly as possible; countries with deficits and debt problems that aren't as dire; or booming emerging-market economies that need to do more to stimulate domestic demand.

The important thing, Mr. Flaherty said, is that the G20 agrees on the broad strokes and acts collectively, as it did two years ago when leaders agreed to pump billions of dollars into their economies to keep them from sliding into depression.

The minister's signal of flexibility on deficit targets came hours after German Chancellor Angela Merkel predicted conflict at the G20, citing the more ambitious austerity plans being put in place in Europe as governments try to appease skittish bond investors. Europeans, and Germans in particular, "are of the opinion that the reduction of deficits is absolutely necessary to create sustainable economic growth," Ms. Merkel told reporters in Berlin before leaving for Canada. "There are others who don't see the exit strategy as we see it; I think there will be very fruitful but also controversial debates on these themes."

On top of the fiscal fissures, it seems Canada has abandoned any illusion that G20 leaders bent on pushing a bank tax can be persuaded to drop the idea so the summit can focus on what Canadian officials call the "core" financial-reform agenda, namely boosting standards for banks' capital and leverage.

Germany, France and Britain this week said they will go ahead with a bank tax, an idea Mr. Flaherty called a "distraction" that "gets much more attention than it deserves."

The fact that the bank-tax issue re-emerged after Mr. Flaherty worked so hard to bury it suggests the Europeans may be picking a fight even though they don't need the body's permission to proceed with their plans, said Dries Lesage, a political science professor at Ghent University in Belgium who specializes in global governance.

"I do not think the G20 has leeway to tell countries what they should do exactly on that - Germany has its plan, Britain has its plan," Prof. Lesage said in an interview. "The G20 could end up just taking note about what countries individually are going to do, and choosing some diplomatic language for that."

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