UK seeks to inject optimism into G7 gloom

BRITAIN put forward new proposals last night to salvage world trade talks in an attempt to inject some optimism into a gloomy meeting of the world's seven largest industrialised countries.

John Major's proposals, which are believed to lengthen the period over which farm export subsidies would be reduced in an attempt to mollify France, could result in a stronger summit statement on Gatt (General Agreement on Tariffs and Trade) in the final communique. British officials indicated the leaders could call for a successful conclusion to the Gatt talks before the end of the year, a stonger commitment than they made at past summits.

Leaders of the seven, at a loss over how to lift the flagging confidence of their voters, yesterday opened their three-day Munich summit with a sombre assessment of the economic outlook.

The leaders of Britain, Canada, France, Germany, Italy, Japan and the United States were said to express pessimism at the upswing in 'loss of faith' among their peoples, a senior French official said.

While the summiteers admitted that only a breakthrough in the Uruguay Round of world trade talks could set the scene for an economic expansion, their officials strove to break the deadlock.

Secret negotiations have been going on between senior US and EC officials for the past few months. Gatt officials say that the obstacles to a deal are political rather than technical.

Any Gatt deal would do much to restore battered economic confidence. The gathering in Munich yesterday did little to cheer financial markets, with no apparent hope of action to revive world growth. Shares slumped in London as the prospect of an early interest rate cut faded.

However, speculation that there would have to be a realignment of exchange rates in the European Monetary System appeared to have been quashed by Italy's decision at the weekend to raise its interest rates.

Francois Mitterrand, under severe political pressure in France, said the huge numbers of unemployed in the industrial world represented a 'social gangrene'. Several leaders admitted that a lacklustre recovery - the best expected - would do little to return many of those people to work.

Nicholas Brady, the US Treasury Secretary, said economic growth in the US would slow in the second quarter, although he added that he was optimistic about the longer-term prospects.

Norman Lamont, the Chancellor, cast a ray of hope on the proceedings. He told fellow finance ministers that Germany and Italy's proposals to cut into their swollen budget deficits would ultimately pave the way for lower interest rates in Europe, including those in Britain. Mr Lamont added that Britain would play its part in creating room for lower rates, with a tight public spending round in the autumn. As the leaders debated the darkening economic outlook, the threat of military action in the former Yugoslavia also loomed.

Mr Mitterrand last night suggested that non-UN troops with the power to shoot back if necessary might have to be considered to defend aid convoys on the road to Sarajevo. The US was also thought to favour the use of helicopter gunships for the protection of a corridor from the coast if all other means of relieving the besieged city should fail.

A separate declaration on the subject will be issued tomorrow, before the heads of state move on to talks with Boris Yeltsin, the Russian President.

The head of the International Monetary Fund, Michel Camdessus, admitted yesterday that he had backed down from some of the key free market reforms he was demanding as a price for a dollars 1bn loan to Russia.

He said the IMF accepted that Russia should bring oil prices to world levels only over time, and not according to a deadline, as the IMF had once insisted.

Summit reports, page 10

Hamish McRae, page 23