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G-20 battleline: Stimulus versus austerity

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What to expect at the G-20
STORY HIGHLIGHTS
  • G-20 summit of world leaders takes place in Toronto
  • A dividing line is forming between austerity and stimulus
  • The U.S. cautions against reducing stimulus packages too soon
  • Europeans say mounting public debt threatens their economies

(CNN) -- As world leaders meet in Toronto for the G-20 summit, disagreements are brewing over how the global economy's fragile recovery should best be steered.

The United States has been urging other countries not to pull back on stimulus plans too quickly. Britain, in contrast, has recently joined other European countries in announcing drastic budget cuts as fears grow about mounting public debt.

The last G-20 summit was September in Pittsburgh. Since then sovereign debt issues have clouded the global economic recovery. Dubai's debt worries in November foreshadowed the Greek debt crisis, which spiraled to other southern European nations. Public debt woes saw the value of the euro dip from $1.50 in December to below $1.20 earlier this month, sparking fears the 17-nation bloc united under the currency may collapse.

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U.S. President Barack Obama fears a roll-back too soon from government stimulus packages would send the world back into recession. The European Union has sent a letter to all G-20 leaders asking for substantial budget cuts to come no later than 2011.

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"The Germans are worried about the knock-on effects of southern Europe financing. And the Americans, not having experienced that problem, don't recognize it and they don't understand why countries should be cutting back when in fact the recovery is at such a nascent stage," said Simon Evenett of the Center for Economic Policy Research.

Also high on the agenda will be reforms to global banking regulations. Although all G-20 nations pledged banking reforms, the reforms being mooted in Europe and North America are diverging. Britain, France and Germany are calling on taxes on banks to pay down deficits and cushion future financial shocks.

The U.S. wants to discourage additional taxes, which officials fear will stunt consumer demand.

"Behind the calls for us to pursue a more expansionary fiscal course lie two different approaches to economic policymaking on each side of the Atlantic," German Foreign Minister Wolfgang Schäuble wrote in a Wednesday op-ed piece in the Financial Times. "While U.S. policymakers like to focus on short-term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation."

UK Treasury Chief Secretary Danny Alexander said: "We will have to see what comes out of the G-20. I'm not going to give any forecast on that. I think it is important that we have acted because we recognize the risks the banking system poses to the U.S. economy. Certainly, France and Germany recognize those risks, also."

The sessions will offer a first appearance on the world stage for British Prime Minister David Cameron and Japanese Prime Minister Naoto Kan. Both leaders arrived in Toronto on Thursday. Other leaders are arriving Friday.

CNN's Jim Boulden contributed to this report