EU chiefs plot economic boost Interest rate cuts backed as nations plan for debut of common currency

October 26, 1998|By NEW YORK TIMES NEWS SERVICE

KLAGENFURT, Austria -- With left-center majorities in power in most of the 15 countries of the European Union, its leaders ended a weekend summit meeting yesterday in broad agreement that it was time to pursue less restrictive economic and monetary policies to guard against a world recession.

"Europe now has the means to be a growth factor in the world," said French Prime Minister Lionel Jospin, a Socialist. He spoke after many government leaders, meeting at the Alpine lakeside resort of Portschach, urged coordinated reductions of world interest rates to end the global financial crisis.

"Reducing unemployment is the most important single question for the people of Europe," German Chancellor-elect Gerhard Schroeder said Saturday in his debut before his fellow European Union leaders.

Austrian Chancellor Viktor Klima, who presided over the discussions, said yesterday that leaders here agreed conditions were right for interest rate cuts in all 11 countries that will start introducing a common European currency, the euro, next year.

Schroeder, a Social Democrat who led his party to victory in last month's German elections and will formally replace Chancellor Helmut Kohl tomorrow after 16 years of conservative rule, left many fellow leaders here with the clear impression that Germany was determined to strike a new course after years of harping on the dangers of inflation.

Indeed, after years of scrimping and cutting government deficits to get ready for the euro, Germany and countries that have followed its lead now seem set to press the independent European central bank to let up a little and allow them to use the new currency to stimulate economic growth.

France and Germany have always thought of themselves as the European Union's prime movers, and leaders in both countries agreed last week that Europe could now follow less restrictive fiscal and economic policies and encourage consumer spending.

Coordinated growth policies, Jospin told his counterparts here, would preserve Europe as an island of growth in a global market economy severely shaken by recession in Asia, financial collapse in Russia and looming trouble in Brazil.

Inflation is negligible now, Jospin said in so many words, so why not go for growth?

But European governments do not have the last word about interest rates -- central banks do.

The independent European central bank in Frankfurt will decide those for the euro. The bank's chairman, Wim Duisenberg, has been skeptical in the past week about joining a global push to lower interest rates.

Floor rates set by central banks in Germany and France are at their lowest levels since the 1980s, between 3.2 and 3.3 percent, but are now higher in Britain, Italy and Portugal, where inflation was long a problem.

"The time is right to cut interest rates," said Massimo D'Alema, Italy's prime minister-designate and a former Communist. "The hope is for a general reduction in rates, starting in Germany," he said.

Portuguese Prime Minister Antonio Guterres agreed. "We are all convinced that conditions exist for a significant reduction of interest rates at the international level," he said.

The key European problem is unemployment, which at an average of more than 10 percent -- 18 million workers in all -- has stubbornly resisted measures by conservative and leftist governments alike.

Conservatives like Kohl blamed it on the rigidities and high payroll taxes of the European welfare state, an argument that among leftists only Tony Blair, Britain's Labor Prime Minister, by and large accepted.

Blair said that he would call for a special summit meeting of the world's seven most powerful industrial democracies, a group that includes the United States, Canada and Japan as well as the biggest Western European economies, by the end of this year to discuss the global crisis, if there was enough agreement on what a meeting should accomplish.

Although their left-wing majorities are trying for a common front in economic policy, European states have had a much harder time presenting a united face to the rest of the world in foreign policy and defense.

Blair told his fellow leaders that the European Union had far too often shown itself to be "dithering and indecisive" in the crisis over Kosovo, leaving the American-led NATO alliance as the only effective leverage.

Blair said that Europe should think about ways to develop a capability to use military force in situations where the United States did not consider its own interests directly involved.

He suggested a separable European defense identity within NATO.

But President Jacques Chirac said that France would prefer to develop a military arm for the European Union, a step resisted by many of its partners.

Pub Date: 10/26/98

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