The top White House economic advisor said on Thursday world leaders must keep the tentative global recovery on track as Europe headed into this weekend's G20 summit defending plans for heavy cost-cutting.
The United States and some European countries have stressed different priorities for economic policy now that the world is emerging from its worst slump in decades.
Lawrence Summers, in an interview with Reuters ahead of the Group of 20 meeting in Toronto, said governments must work to avoid the risk of a protracted stagnation which could aggravate fiscal problems.
But Summers sought to downplay differences with Europe over the need to tackle high debts and deficits as part of the way forward for policymakers.
One important aspect of that focus needs to be...on fiscal sustainability. Just how that's done, just what the pacing is, is something that will inevitably vary from country to country, he said.
Top European officials defended austerity plans with German Chancellor Angela Merkel insisting Berlin would move ahead with its biggest program of fiscal cutbacks since World War Two.
European Central Bank President Jean-Claude Trichet said it was wrong to assume budget austerity would lead to stagnation.
The idea that austerity measures could trigger stagnation is incorrect, he told Italian newspaper La Repubblica, describing the German budget plans as good and repeating calls for more fiscal discipline in the 16-nation euro zone.
Merkel, who aims to save 80 billion euros in the next four years, said now was the time to impose more financial discipline
We'll enact the measures that we've agreed upon, Merkel said in an interview with German ARD television broadcast on Thursday. I believe we should not let up.
German Finance Minister Wolfgang Schaeuble, writing in Handelsblatt newspaper, said he could not understand the implicit accusation that Germany was wrecking the recovery with austerity measures because Berlin was doing a lot to stimulate growth.
After winning praise for steering the world economy through the financial crisis, the G20 countries find themselves struggling to keep a unified line on what comes next: supporting still-shaky growth or cutting budget deficits.
Markets are jittery about the soaring levels of debt in many rich countries and the risk of an economic slowdown. The cost of protecting government debt against default hit a record high for Greece on Thursday and jumped in other peripheral countries such as Portugal.
The draft version of the Toronto summit communique, dated June 11 and obtained by Reuters on Wednesday, said the recovery was uneven and fragile and warned against complacency.
Fiscal challenges in many states are creating market volatility, and could seriously threaten the recovery and weaken prospects for long-term growth, it said.
President Lee Myung-bak of South Korea, which currently chairs the G20, said that while the global economy was recovering, each country must seek to keep recovery on track while developing its own concrete, reliable exit strategy.
But they also have to consider any subsequent ripple effects that might spread through neighboring countries, Lee told Toronto's Globe and Mail newspaper.
The United States has warned against withdrawing support too soon, mindful of when the government slammed the brakes on spending in the 1930s, prolonging the Great Depression.
But Summers took a softer line on Thursday, dismissing talk that the G20 leaders would clash over whether to push for fiscal prudence or sustaining growth.
I am sure there are people who will try to divert (the G20 leaders) into an argument about the brakes versus the accelerators but I have never seen a car with only a brake or an accelerator, Summers said.
One of the first things they taught me...in my driver's ed course was that, never, ever could you fail to look down the road even as you are looking at what is right in front of you.
The U.S. Federal Reserve on Wednesday acknowledged a faltering pace of U.S. economic recovery as it renewed its vow to hold benchmark interest rates exceptionally low for an extended period. But it stuck to its expectation that the economy will continue to gradually improve.
BACKLASH AND BUDGET CUTS
In Europe, a market backlash against countries seen to be dragging their feet on cutting debt and deficits has sparked budget cutbacks as governments try to rein in spending.
French unions staged a nationwide strike on Thursday over plans to reform the pension system following similar protests in Spain and Greece, where ministers were due to meet on Thursday to discuss their own pension reforms.
Spanish Economy Minister Elena Salgado said she was confident the minority government's budget would pass the national parliament in September, when unions have also scheduled a general strike.
G20 leaders must also forge consensus on how to harmonize financial regulatory reforms and ECB chief Trichet said he was confident the G20 was on the right track.
The G20 summit takes place in Toronto on Saturday and Sunday. The group includes the world's biggest economies and covers two-thirds of the world's population.
It will be preceded by a meeting of the G8, composed of Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.
(Additional reporting by Nigel Davies in Madrid and Sakari Suoninen in Frankfurt, writing by Krista Hughes and Andrew Quinn, editing by David Storey)