US to push for lower interest rates in Europe

IMF in Washington: Europe's policy mix tops the agenda at G7 meeting as Wolfensohn promises to turn World Bank around
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The Independent Online
Tensions over interest rates are likely to cast a cloud over today's meeting in Washington of finance ministers from the Group of Seven (G7) industrial countries. The US administration is expected to press for lower European interest rates in order to boost growth.

Robert Rubin, US Treasury secretary, said the question of the right mix of monetary and fiscal policy in Europe would be on the agenda at the meeting. "We are very interested in the European policy mix. It is very important to the US that Europe grows," he said.

The Americans share the concern that efforts by governments on the Continent to cut their budget deficits in the run-up to the single currency run the risk of slowing the economic recovery too much. Although the German economy has displayed some signs of revival, growth in France remains weak.

US lobbying for a further cut in French and German interest rates is likely to get support from Britain. A senior official said: "It is a very good question. Why not ease the interest rate? It will be interesting to hear the German answer."

The International Monetary Fund also favours a reduction in the cost of borrowing on the Continent. Its World Economic Outlook, published this week, said the process of rate reductions in Germany had not come to an end.

The IMF predicts much slower growth in the EU than in the US this year, and although it predicts a pick-up in Europe next year that is due mainly to robust growth in the UK. It puts growth in Germany and France at 1.3 per cent this year and 2.4 per cent next year, based on the assumption that rates fall further, compared with 2.4 per cent then 2.3 per cent in the US.

If Germany does not ease monetary policy it will face an awkward choice. Either the link between pre-EMU budget cuts and slow growth will become increasingly obvious, or there will be less success in trimming government deficits, in which case the figures will have to be fudged for the single currency to go ahead on time.

The Germans are expected to warn of the need for higher interest rates in the Anglo-Saxon economies - a view again supported by the IMF. "There will be an interesting discussion about the stance of US policy," one European official remarked drily. Michael Mussa, the IMF's director of research, said prudence would dictate higher interest rates in the US and UK during the next year.

"There is a concern as we look forward into 1997 that the risks are more on the side that inflation may pick up modestly," he said. Mr Rubin said he had "noted" the IMF's recommendation that American interest rates would need to rise at some point. He said the economy was in very good shape.

On Tuesday the Federal Reserve delighted the Administration and surprised the financial markets by holding rates steady. Following the leak of a document showing that eight regional Federal Reserve Banks favoured an increase, analysts had confidently expected the policy-making Open Markets Committee to agree.

Alan Greenspan, Fed Chairman, has called in the FBI to trace the leak.

The G7 meeting is also due to discuss the poor country debt initiative and opening up trade to developing countries. The UK is supporting proposals by Renato Ruggiero, head of the new World Trade Organisation, to open world markets further to developing countries.

The non-US countries are also sure to attack the Americans again over the controversial Helms-Burton legislation, which applies sanctions to companies from other countries which do business with Cuba. The law has been bitterly criticised outside the US and has provoked the most serious trade row between industrial economies for many years.