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German rate cut takes G7 heat off Europe's leaders

WASHINGTON: Policymakers at a meeting of the Group of Seven industrialised nations in Washington on Sunday found a potentially acrimonious debate on weak European economies had been deftly deflected in advance by Germany.

Last week's half-point cuts in the Bundesbank's official discount and Lombard rates, which allowed central banks across Europe to trim their credit costs, drew praise from its G7 partners and neatly robbed its critics of an easy target.

The United States, Japan and Canada -- who join Germany, France, Italy and Britain in the Group of Seven rich nations -- expressed concern at a sudden dip in Europe's economies.

But they fell short of seeking any dramatic change in their policies, with G7 chairman U.S. Treasury Secretary Robert Rubin calling generally for policies that promote growth.

"In the broad sense, we believe that despite the recent pause in some countries, the G7's underlying fundamentals are promising, particularly in light of progress reducing inflation," U.S. Treasury Secretary Robert Rubin said.

"They require that policies continue to be directed at sustaining non-inflationary growth and, where necessary and appropriate, at strengthening recovery."

Germany and France, the two countries at the bottom of the G7 growth ladder in 1996 -- according to forecasts produced last week by the International Monetary Fund -- made clear in their remarks that the downturn was only temporary.

German Finance Minister Theo Waigel, accepting that a one percent IMF growth forecast was probably realistic, told a briefing, "There is no danger of sliding into a recession".

And his French counterpart Jean Arthuis said French growth was on a trend of 2.5 to three percent, well above this year's 1.3 percent growth forecast by the IMF.

Italy and Britain, reaping short-term benefits from a depreciation in their currencies in recent years, are still expected to show growth rates of more than two percent this year although this marks a slowdown from 1995.

The spotlight on weak growth was also dimmed by serious efforts to rein in public spending by many European countries -- a task given greater urgency by the need to meet a 1997 deadline to qualify for entry to the European single currency.

"They (Europe) are very much involved in determining what policy mix will accomplish their commitment to fiscal responsibility ... and at the same time maintain solid growth. That's very much in the front of their agenda right now," Rubin said.

Germany, which last year notched up a 3.6 percent deficit compared with Gross Domestic Product -- well beyond a three percent target level -- wooed its critics with details of spending cuts it hopes to push through parliament this week.

"The G7 has high expectations that we will be successful in reducing our budget shortfall," Waigel said.

Arthuis, also reiterating a commitment to cut public deficits, said there would be no taboos in a forthcoming French debate on budget plans.

But the Europeans secured only modest support for one of their major wishes -- the hope that a further rise in the dollar would allow their own currencies to ease back further, thereby boosting their exports.

In the run-up to the meeting, Germany had made no secret of its desire for a stronger dollar to help lift its economy from the doldrums. France also said on Sunday it saw scope for the U.S currency to go higher.

Asked if he backed these calls, Rubin would only reiterate his long-standing policy on the dollar.

"The United States believes in a strong dollar. It's in our economic interest," he said.

Arguing that exchange rates will "in the final analysis" reflect underlying economic conditions, Rubin said, "What all of us need to do is focus on the fundamentals and get the fundamentals right."-Reuter