He gave no hint where or how deep the ax would fall. But in his bluntest terms since taking office, the prime minister said Britain's deficit was the biggest ever recorded in peacetime, that its debts were unsustainable and that austere times lay ahead.
"Because the legacy we've been left is so bad, the measures that we need to deal with it will be unavoidably tough," Cameron said in a speech in Milton Keynes, north of London. "But people's lives will be worse unless we do something now."
In Berlin, meanwhile, Merkel's ruling coalition said it could narrow Germany's budget gap by $13.3 billion next year.
"The last few months have shown … how important it is to have solid finances," Merkel said, touting the new measures as Germany's toughest since World War II.
Countries across Europe have unveiled austerity packages of varying magnitude in recent months in an attempt to reassure investors that they can pay their bills and that the euro will survive.
Greece, Spain, Ireland, Portugal and Italy, all in the Eurozone, say they are committed to deep cuts despite the hardship such measures will cause and the social unrest threatened by unions and other groups.
Beyond the economic fallout, many investors worry that Europe could lead the world into a new banking crisis.
European banks, nervous about lending to one another amid mounting concern about the continent's financial situation, in recent days have been parking record sums in overnight deposits with the European Central Bank.
"That tells you that [banks] believe that cash under the mattress" is safer than lending to one another, said David Ader at investment firm CRT Capital Group in Stamford, Conn.
Despite the May 10 announcement by the European Union and the International Monetary Fund of a nearly $1-trillion, three-year plan to lend to any countries that couldn't roll over their debts in normal market channels, investors have devalued bonds issued by Spain, Portugal, Italy and other deficit-ridden countries.
That has caused rising concern about the health of the European banking system because many of the banks own huge chunks of government debt.
European bankers' reluctance to lend to each other is bringing back memories of the credit nightmare that followed the failure of brokerage Lehman Bros. in September 2008. The global financial system suddenly seized up as banks shut off lending. The system only began to thaw after governments and central banks worldwide announced massive aid and guarantee programs to support the banks.
But those same programs helped cause many countries' budget deficits to balloon.
In effect, global investors are now penalizing countries for their bailout efforts, said Tony Crescenzi, a portfolio manager at bond fund giant Pimco in Newport Beach.
"The solutions themselves are being seen as a magic elixir that has morphed into poison," he said.
Lee reported from Washington, Chu from London, and Petruno from Los Angeles