Gordon Brown's plan for recovery rejected by Germany

Ian Traynor and David Gow in Brussels
The Guardian, Friday 20 March 2009

Angela Merkel, the German chancellor, yesterday opened up a new rift with Britain and the United States ahead of the G20 summit in London when she delivered a blunt rejection of extra fiscal stimulus packages as advocated by Gordon Brown and the Obama administration.

As European leaders prepared to meet in Brussels to hammer out a common position on the financial and economic crisis before the summit in a fortnight, Merkel insisted the focus of any global recovery plan should be on reining in the markets. "It is not time to look at more growth measures. I disagree with this idea completely. The existing measures must work, they must be allowed to develop," she said in a speech to the Bundestag.

"A competition to outdo each other with promises will not calm the situation," she added, describing transatlantic contradictions in response to the crisis as "very dangerous".

She said: "We need to send good psychological signals from London and not engage in a competition for unrealisable growth packages. We have already done our part."

But last night the EU's 27 leaders acknowledged the scale of the crisis threatening to blow both the bloc and the 16-strong eurozone apart when they agreed in principle to double to €50bn £47bn) a special EU fund to help countries in balance of payments problems. Around €10bn has already been committed to bailing out Hungary, Latvia and Romania. .

The Czech premier, Mirek Topolánek, who chaired the meeting, said the increased EU fund could be used to help rescue eurozone countries in trouble, such as Ireland, as well as eastern European states afflicted by soaring deficits, unemployment and mortgage defaults.

Germany claimed it had won the argument with the "Anglo-Americans" over how to regulate and supervise the financial markets. But differences persisted in Brussels, with No 10 insisting the supervision of financial institutions should remain "a national competence". France and Germany demanded "decisive steps towards a European regulatory framework" by June.

Peer Steinbrück, Germany's finance minister, and Merkel said Europe and the US had to reach agreement on common measures to try to stall the slide into worse financial catastrophe. "We now have decisions that would have been completely inconceivable a year ago," Steinbrück told the Süddeutsche Zeitung. "Hedge funds and ratings agencies will be put under state regulation, cross-border banks will be supervised. The very fact that the Anglo-Americans have agreed to the principle 'no market, no actor, no product without supervision' is huge progress."

Merkel and the French president, Nicolas Sarkozy, are pressing for the EU to adopt last month's proposals from a Brussels working group for a European supervisory body that would oversee the City of London for the first time. But British government officials ruled out the pan-European approach. Instead, they said the report on Wednesday from Lord Turner, chairman of the Financial Services Authority, should be the blueprint for EU regulation. The Americans have been pushing for more fiscal stimulus from the Europeans, a position tacitly supported by Brown. But last night British officials dropped such demands, saying fiscal stimulus would not be on the agenda at the EU meeting, which ends today.

The EU argues that combined European spending programmes amount to €400bn and are a match for the White House's, given the different welfare and social security systems in Europe and the US.

"The Americans are claiming they are doing a lot more," said a European commission official. "We're telling the US, you need not give us lectures."

German resistance to increasing the EU's stimulus package hardened as Steinbrück admitted that economic contraction at home could be worse than the 2.25% he has forecast - and France admitted it faced its worst slump for 30 years, with the economy likely to decline by 3%.