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European leaders

face tough growth

questions at G7

FRANKFURT: Financial leaders of Europe's top four economies will head for Washington this weekend basking in the glow of a German rate cut, but aware they still face major economic and political problems at home.

The meeting, of the Group of Seven industrialised nations -- Japan, Canada, Italy, Britain, Germany, USA and France -- opens on Sunday.

Germany, which the International Monetary Fund forecasts will see the weakest growth among key industrialised nations in 1996, paved the way for rate cuts in several European countries by cutting its discount and Lombard rates by 1/2 point each.

Asked at a news conference whether he expected to be praised for the decision to cut interest rates, Tietmeyer said, tongue-in-cheek, "We never wait for applause."

Indeed, the rate cut is likely to quieten only some of the tough questions likely to be posed by Europe's partners in the G7 as to why major European economies have suddenly found their growth rates foundering.

Giampaolo Galli, chief economist at Confindustria, Italy's employers' association, said the tensions caused by growth in the U.S. on the one hand and a slowdown in Europe in the other were bound to to find a place on the agenda.

"Long-term interest rates remain higher in Europe than in the U.S. despite prospects of low economic activity and low inflation in Europe," he said. "This is a problem."

U.S. Treasury Secretary Robert Rubin has already warned he will seek reasons for weak growth in Germany and France the meeting.

Meanwhile IMF Managing Director Michel Camdessus urged France to follow Germany's lead and cut interest rates to reinforce economic growth in the second half of this year.

Camdessus, clearly pleased by German rate action, said France could take advantage of the strong French franc and the progress it has made in reducing its budget deficit and cut rates too.

Thomas Mayer, senior economist at Goldman Sachs in Frankfurt, said "Europe is clearly worrying, Germany in particular."

He said the continental European countries, which failed to make many of the liberalising reforms which Britain implemented in the 1980's, are likely to counter the criticism with pledges to revamp their archaic systems and abandon market rigidities.

However, Britain, alongside Italy, has political problems which mean its focus is still firmly rooted at home.

Italy goes to the polls on Sunday, while Britain's conservative government is still clinging to a razor-thin majority amid a continuing row about the safety of its beef following a European Union ban on world-wide exports.

This leaves the entire European contingent looking relatively weak, meaning their demands on other partners are likely to be few, analysts said.

This paves the way for the leaders of the seven countries to find common ground in some key areas.

They are likely to pat themselves on the back for their successes in securing an "orderly reversal" of the dollar's slide -- G7-speak for a subtly-engineered recovery in the U.S. currency which was first sought at a meeting one year ago.

The dollar has risen about four pfennigs in the last four weeks, breaking through the psychological barrier of 1.50 marks for the first time since February last year. It had plunged to an all-time low of 1.3450 marks last March.

One G7 source said the leaders would welcome the exchange rate movements of the last few weeks as a good illustration that the call for an orderly reversal was being met.

Yet Alison Cottrell, international economist at PaineWebber in London, said new statements on the dollar were unlikely.

"On forex, the G7 has only really made official statements when things were going wrong," she said.

Tietmeyer said he expected Russia's problems and Europe's progress toward European monetary union to be discussed in Washington, along with increased funding for the International Monetary Fund.

G7 sources said talks would also look at the question of improving debt relief for the world's poorest countries.-Reuter