Merkel’s Austerity Allies Dwindle as Trudeau Debuts at G-7

  • Trudeau’s government signals sharp shift in favor of spending
  • German chancellor to meet with Canadian leader at summit

German Chancellor Angela Merkel is attending the Group of Seven leaders’ summit in Japan with a diminished flank of pro-austerity allies.

QuickTake Canada

As leaders from the U.S., Japan, Germany, France, the U.K., Italy and Canada prioritize tackling a global slowdown, the debate over stimulus versus belt-tightening is poised to shift with Canadian Prime Minister Justin Trudeau’s first appearance at the G-7 table.

Since taking power in November, Trudeau has moved Canada’s economic focus toward infrastructure spending and cash transfers, from predecessor Stephen Harper’s mix of tax cuts and deficit reduction.

Merkel, 61, held a one-on-one meeting Thursday with Trudeau, 44, on the sidelines of the G-7 summit in Ise-Shima in central Japan.

“The Canadian position will be different,” Trade Minister Chrystia Freeland told reporters Wednesday in Tokyo. “Canada, at this meeting, will be speaking strongly on the side of investing for growth rather than in favor of austerity."

The minister singled out the G-7 host, Japanese Prime Minister Shinzo Abe, who has made fiscal and monetary stimulus a cornerstone of his economic policies. Abe is a “real pioneer in emphasizing the need for governments to use fiscal tools and, as you know, our government is very much in agreement.”

In their meeting, Merkel and Trudeau discussed a looming Canada-European Union trade pact, anti-terrorism efforts, migration and "Russian interference in Ukraine," according to a statement released by Trudeau’s office. The statement made no reference to talk of austerity or the slumping global economy, while Trudeau was said to have called for investment in a separate meeting of all G-7 leaders.

"It’s not a question of whether to make investments, but what we are making investments in‎," Trudeau told the leaders in the closed-door meeting, according to a written summary released by spokesman Cameron Ahmad. "How are we using fiscal policy in line with our various capacities is going to be incredibly important."

G-7 Ally

That message isn’t likely to go down well with Merkel, who has lost a G-7 ally in Harper -- his conservative government was a bulwark against calls for stimulus in favor of fiscal restraint and austerity. That leaves the German chancellor with U.K. Prime Minister David Cameron as a fellow champion of fiscal restraint.

Leaders in Ise-Shima may not be able to move beyond the discord of a G-7 finance ministers meeting last week, also in Japan, where they agreed that each member may draw from a menu of monetary, fiscal or structural reform measures as they see fit.

Germany has embraced that language, saying it isn’t against limited infrastructure investment that bolsters digital access and other targeted areas, while pushing the argument for structural reform as the best option, according to a German official who briefed reporters in Berlin on Friday. The official spoke on condition of anonymity in line with government protocol.

The U.K. has also held the line. Chancellor of the Exchequer George Osborne introduced a further 3.5 billion pounds ($5.2 billion) in spending cuts by 2020 in his March budget as a way to balance the nation’s finances. Cameron plans to urge the G-7 to embrace flexibility and not attempt to adopt a “one size fits all” economic policy, his office said in a briefing.

‘Balancing Trick’

In Canada, Trudeau is pushing his country into deficit amid a charm offensive calling for growth and investment. His debut budget in March proposed nearly C$120 billion ($92.5 billion) in cumulative deficits over six years.

A Canadian official last week joined those in citing Germany as a country that could do more to drive growth, though Trudeau’s negotiator at the summit, Peter Boehm, downplayed divisions between Merkel and Trudeau.

"It’s a balancing trick on how economic management is undertaken in countries, and each country has a particular set of circumstances," Boehm told reporters on Thursday. "Fiscal stimulus is obviously important for the government of Canada, as it is for other governments as well. There’s also a debate that continues on structural reform and austerity, and the idea is to get the mix right."

Merkel’s government instead has called for budget discipline and so-called structural reforms aimed at loosening labor market restrictions and boosting competitiveness. The chancellor’s stance on economic policy has been the hallmark of the euro-area’s approach to its currency crisis since 2009.

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