Merkel Tells Obama Spending Cuts to Boost Economy, Not Put Brake on Growth

Chancellor Angela Merkel championed German export strength as “the right thing” for her country, spurning President Barack Obama’s call to boost private spending as both leaders prepare for Group of 20 talks.

Merkel, addressing a business audience in Berlin today, said she told Obama in a phone call that cutting government debt is “absolutely important for us,” exposing a second point of contention ahead of the June 26-27 G-20 summit in Canada.

Reducing the budget deficit by 10 billion euros ($12 billion) per year “won’t put a brake on the world’s economic growth,” Merkel said, relating what she told Obama yesterday. Germans are more likely to spend money if they feel the government “is taking precautions” to ensure solid finances, she said.

Four days before world leaders meet in Toronto, Germany is heading for conflict with the rest of the G-20 over tighter financial regulation, a banking levy and U.S. calls to boost growth rather than cut debt.

The G-20 must “safeguard and strengthen” the economic recovery and promote “global demand growth that avoids the imbalances of the past,” Obama said in a June 16 letter to fellow G-20 leaders. He expressed concern about “heavy reliance on exports by some countries,” which he didn’t name. Treasury Secretary Timothy F. Geithner called on June 5 for “stronger domestic demand growth” in European countries like Germany that have trade surpluses.

‘Export Strength’

The German government is ready to consider measures to strengthen the service industry and help the jobless back into work to bolster consumption, Merkel said.

“But what we certainly can’t do is influence our export strength,” she said. “It’s a fact. It’s the right thing.”

Asian countries are driving economic growth and “an export nation like Germany benefits from that very nicely,” she said. “But that doesn’t mean we can let up on the issue of competitiveness.”

Merkel said on June 11 that she expects to have a “hard time” from fellow leaders at the G-20 meeting, where Germany and France are leading Europe’s push for a global commitment to impose bank levies and a tax on financial transactions.

The G-20 faces a test of unity on the banking levy, a German government official said earlier today, warning that leaders can either pull together or split into two camps over the tax. The official spoke to reporters on condition of anonymity.

‘I Will Fight’

Merkel pointed out that countries such as Canada are resisting a bank levy and said it’s uncertain whether the G-20 will agree on a financial-transaction tax. “I will fight, but I also have to say that I can’t say anything about the outcome today,” she said.

Obama’s letter urged the G-20 to reaffirm its “unity of purpose to provide the policy support necessary to keep economic growth strong,” saying order to public finances should be restored in the “medium term.”

Obama’s appeal “isn’t anything that goes against what we are doing,” Merkel told reporters yesterday. “If we don’t get onto a path of sustainable economic growth but have rather a growth bubble, then if the next crisis comes we won’t be able to pay for it.”

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

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