Merkel says EU will "swiftly" end stimulus programs, focus on debt

Yesterday, Barack Obama implored the EU to continue down the path of government spending and borrowing in order to keep Western economies afloat.  Today, Obama got his answer from German Chancellor Angela Merkel in the form of a rebuke.  The upcoming G-20 conference will sharply change economic policy direction for the EU, which intends to stop its Keynesian public-spending projects and start repairing its critical debt situation instead:

Europe will push for a swift exit from fiscal stimulus programs and a focus on budget consolidation at the G20 meeting next week, German Chancellor Angela Merkel said on Saturday.

“European participants are of the opinion that this is urgently necessary to prevent such crises from happening again in the future,” Merkel said in her weekly podcast. …

Merkel’s stance contrasted with that of U.S. President Barack Obama, who this week said public finance problems should be addressed “in the medium term” — a warning that clamping down budgets should not be done at the expense of recovery.

European governments have been launching austerity measures to head off a spread of the debt crisis begun in Greece.

EU leaders got a look into the abyss this year with the near-collapse of Greece.   Had that cancer spread throughout the Continent, it would have touched off a global financial crisis that would have been worse than the first shock in 2008 when the US housing bubble popped.  With its debt well above its annual GDP, Greece had no way of shoring itself up without substantial assistance from its EU partners, who began looking at their own balance sheets and wondering which nations would be next to go. That was enough to cure Europe of its Keynesian impulses, at least for now.

It’s a strong rebuff to Obama, who explicitly asked the EU to continue its stimulus spending despite the debt issue in the US reaching a critical stage.  It puts the Obama administration to the left of Europe on economic policy, never a comfortable political position in the US.  With the Europeans abandoning big-spending programs in order to start whittling down the massive debt piled up from decades of social spending and weak economic growth, there will be less enthusiasm for continuing to ignore the American national debt in favor of make-work projects in the US that has done little to lift the economy here.

Furthermore, the divide threatens to weaken American economic leadership in the G-20 if Obama insists on pursuing big-spending programs and increasing American debt.  Europe will see that as a sign that the US has not learned any lessons from the Greece failure, and that the Obama administration wants to follow the Greeks into collapse.  We’re becoming a bad bet, and the EU knows what that looks like.