Alarm bells in Europe raise the stakes for G7

ALARMING SIGNS of weakness in Europe's two biggest economies have raised the stakes at today's Group of Seven meeting in Bonn. Wim Duisenberg, president of the European Central Bank, will come under fresh pressure to cut Euroland interest rates.

Figures yesterday showed a shock fall in German GDP at the end of 1998, the first in national output for three years. Business confidence in Germany continued to deteriorate in January, the eighth successive month of decline. In addition manufacturing output in France fell sharply in December.

Analysts said the news improves the chance the ECB will cut rates in March. The markets believe the weakness of the euro since its launch 50 days ago explains ECB reluctance to lower borrowing costs.

The G7 meeting will be the first time Mr Duisenberg has had to face all his critics. Gordon Brown, the Chancellor of the Exchequer, will today back calls from US Treasury Secretary Robert Rubin for the Europeans to cut interest rates to boost demand. Mr Rubin said earlier this week that the disparities in growth between the US and its main trading partners was unsustainable.

The Chancellor and the Governor of the Bank of England, Eddie George, will point to the speed with which the UK has cut interest rates. Treasury officials said yesterday that all countries needed to play their part.

Yesterday's figures showed that German GDP fell by 0.4 per cent in the final quarter of 1998, taking growth for the year to 2.6 per cent from 2.3 per cent in 1997. A sharp fall in exports, down 3.4 per cent in the quarter, accounted for much of the weakness, but investment and government spending also fell.

The latest index of the business climate in Germany from Ifo, the economic research institute, declined to 91.1 in January from 91.4 in December, while the expectations index fell to 96.1 from 96.5.

In France, manufacturing output fell 0.7 per cent in December after a 0.1 per cent drop in November. The year-on-year growth in production slowed markedly to just 1.2 per cent.

Today in Bonn the Chancellor is expected broadly to support proposals by Hans Tietmeyer, Bundesbank President, for a new liaison committee linking central bank governments that could act as an early warning system.

Mr Tietmeyer is proposing a new forum with a small secretariat, which would co-ordinate the work of existing bodies and central banks.

The Chancellor is particularly keen that the various codes on transparency, compliance and supervision being drafted after the Asian and Russian crises are implemented rapidly.