MOSCOW The Group of 20 nations pledged on Saturday to put growth before austerity, seeking to revive a global economy that "remains too weak" and adjusting stimulus policies with care so that recovery is not derailed by volatile financial markets.
Finance ministers and central bankers signed off on a communique that acknowledged the benefits of expansive policies in the United States and Japan but highlighted the recession in the euro zone and a slowdown in emerging markets.
"While our policy actions have contributed to contain downside risks, those still remain elevated," the statement said. "There has been an increase in financial market volatility and a tightening of conditions.
Indications that the U.S. Federal Reserve would scale back its monetary stimulus dominated the two-day talks in Moscow, with emerging markets most concerned by a resulting selloff in stocks and bonds, and a flight to the dollar.
Hosts Russia said G20 policymakers had soft-pedalled on goals to cut government debt in favour of a focus on growth and how to exit central bank stimulus with a minimum of turmoil.
"(G20) colleagues have not made the decision to take responsibility to lower the deficits and debts by 2016," Finance Minister Anton Siluanov told Reuters. "Some people thought that first you need to ensure economic growth.
While the U.S. recovery is gaining traction, China's export motor is sputtering, Japan's bid to break out of deflation has not reached escape velocity, and demand in the euro zone is too weak to sustain a job-creating recovery.
Officials backed an action plan to boost jobs and growth, while rebalancing global demand and debt, that will be readied for a G20 leaders summit hosted by President Vladimir Putin in September.
"We remain mindful of the risks and unintended negative side effects of extended periods of monetary easing," the statement said. "Future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated."
In return for its pledge to 'message' its monetary policy intentions clearly, Washington managed to ensure that the text contained no binding fiscal targets, saying that consolidation should be "calibrated" to economic conditions.
Sources at the meeting said Germany was less assertive than previously over commitments to reduce borrowing to follow on from a deal struck in Toronto in 2010, with the improving U.S. economy adding weight to Washington's call to focus on growth.
With youth unemployment rates approaching 60 percent in euro zone strugglers Greece and Spain, the growth versus austerity debate has shifted - reflected in the fact that G20 finance and labour ministers held a joint session on Friday.
The crisis in the euro zone periphery has been exacerbated by capital outflows, and the communique pledged to move "decisively" with reforms to create a banking union in Europe that could revive cross-border lending.
"The debate between growth and austerity seems to have come to an end, as captured in the G-20's strong statement on growth and jobs," a senior U.S. Treasury official said.
"The U.S. chose to pursue macroeconomic policies that encouraged economic growth and jobs, with fiscal correction once private demand was strong enough to be self sustaining. The G-20 has acknowledged the importance of getting this balance right."
Exchange rates and the threat of competitive devaluations barely figured, delegates said - in contrast to an ill-tempered G20 meeting in February coloured by talk of currency wars.
TREAD WITH CARE
Ben Bernanke's announcement two months ago that the Fed may start to wind down its $85 billion in monthly bond purchases sparked a panicky sell-off, particularly in emerging markets.
Investors were calmed by testimony to Congress this week by Bernanke, who is not in Moscow, although he said the exit plan from money-printing remained on the cards.
The G20 accounts for 90 percent of the world economy and two-thirds of its population - many living in the large emerging economies at greatest risk of a reversal of capital inflows that have been one of the side effects of the Fed stimulus.
"One thing we would like to emphasise is the importance of coordination," said Indonesian Finance Minister Chatib Basri, cautioning that scaling back policies of quantitative easing elsewhere "immediately affects" emerging markets.
The International Monetary Fund warned that turbulence on global markets could deepen, while growth could be lower than expected due to stagnation in the euro zone and slowdown risks in the developing world.
"Global economic conditions remain challenging, growth is too weak, unemployment is too high and the recovery is too fragile," Managing Director Christine Lagarde told reporters.
"So more work is needed to improve this situation."
China faced calls to encourage domestic demand-driven growth and allow greater exchange rate flexibility as part of wider efforts to rebalance the global economy which features a huge Chinese surplus and matching U.S. deficit.
Beijing on Friday offered an olive branch, removing a floor on the rates banks can charge clients for loans, which should reduce the cost of borrowing for companies and households. Yet this received scant attention at the G20 talks.
Japan, which holds an upper house election on Sunday, in turn drew criticism for giving little detail on structural reforms billed as the 'third arrow' of Prime Minister Shinzo Abe's economic turnaround plan, G20 sources said.
Finance Minister Taro Aso said Tokyo would strive to craft a credible fiscal plan by the time of the September G20 summit. Aso also said he would go ahead next April with a planned hike in sales taxes, key to stabilising Japan's public debt which, at over 200 percent of GDP, is the highest in the G20.
(Reporting by Lidia Kelly, Maya Dyakina, Jan Strupczewski, Gernot Heller, Katya Golubkova, Tetsushi Kajimoto and Alessandra Prentice in Moscow, Anna Yukhananov in Washington. Writing by Douglas Busvine/Mike Peacock)