Germany under pressure to cut interest rates: Copenhagen summit discusses jobs and European economy's slide into recession

GERMANY will be urged to cut its interest rates today, as part of a new package of EC growth measures aimed at reducing unemployment.

The Copenhagen summit, the six- monthly meeting of heads of EC government, will be dominated by a discussion of the European economy, which is sliding into recession. The leaders will also discuss longer-term solutions, with the realisation dawning that Europe is going to have take radical steps to rethink employment against the background of 17 million jobless.

European Community leaders will discuss the possibility of co-ordinated cuts in interest rates today, Poul Nyrup Rasmussen, the Danish Prime Minister, said yesterday. 'I can confirm that is on the agenda,' said Mr Rasmussen, whose country holds the EC presidency. 'The problems of interest rates across the European Community I think are self-evident,' said John Major, arriving in Copenhagen.

Mr Rasmussen said that the EC leaders would also discuss taking the Edinburgh initiative on growth a stage further by co-ordinating their budgets for next year, and linking their investment strategies. Lower interest rates would give a big boost to growth. But there was the question of the Bundesbank to consider, he added. The German central bank has come under increasing fire for keeping its interest rates high.

Britain may be targeted by other states for its attitude to monetary co- operation, since the pound is outside the exchange rate mechanism of the European Monetary System and Britain has an opt-out from a European single currency. But Mr Major implied that it was the ERM which was responsible for the problem, saying that interest rates were 'a subject that must be discussed amongst those who find themselves locked together'.

Downing Street sources said that the Prime Minister intended to make 'a robust intervention' on the high costs of labour in Europe. His concern is that the EC's competitive position is being weakened in international markets. Its job creation record compares pitifully to those of the US and Japan, and Downing Street sources said that Europe's unit labour costs were 20 per cent higher than either, and its non-wage labour costs 50 per cent higher. Industry says the EC is pricing itself out of the market, because of the high cost of labour, and Jacques Delors, the Commission's President, has started musing publicly on how the EC should adapt its social policy aspirations. British officials said Mr Major would try to 'persuade Jacques Delors to come over to our way of thinking' by scaling back his aspirations for EC social policy.

The summit will probably lead to a clutch of studies on the subject that could have far-reaching implications for work patterns, training and welfare policy. Socialist leaders meeting in Copenhagen yesterday said that far from abandoning its social policies, the EC should target job creation. But it would also have to redefine the idea of full-time employment through job- sharing and other initiatives, they added.

Mr Delors is worried about the impact the gloom could have on the EC's institutions, and his intentions seem to lie in a more Scandinavian solution, with initiatives at EC level. There is clearly a risk that the malaise will lead to a renationalisation of policy on trade, industry and the economy, as it already has on currencies.

Mr Rasmussen said the summit should issue a clarion call for free trade. 'Protectionism is not a solution that can last in a global economy,' he said last night. Publicly, EC officials are sanguine about calls for greater EC trade protection, such as that launched by Francois Mitterrand on Friday, and say they are still confident of a Gatt deal by the end of the year. But the summit could see a confrontation on trade. Germany will also be attacked for its bilateral deal with the United States.

There are plenty of details to be cleared up on the implementation of the Maastricht treaty, not least the question of where to locate the European Monetary Institute, forerunner of a European Central Bank, an issue which is not expected to be finalised in Copenhagen. Chancellor Helmut Kohl of Germany has re-emphasised that he wants a new EC summit in the autumn - perhaps October - to relaunch the Community.