EC sunk in economic gloom

GERMANY'S Finance Minister, Theo Waigel, is likely to face an unprecedented grilling today from his European partners about the damaging effect they believe high German interest rates are having on other European economies.

EC finance ministers arrived in Bath last night for an informal two-day meeting that is certain to be dominated by discussion of France's impending referendum on the Maastricht treaty.

The mood before last night's welcoming dinner was dampened by confirmation from the European Commission that the recession inside the Community is likely to be deeper and to last longer than it previously believed.

Henning Christophersen, the Brussels Finance Commissioner, told the Independent yesterday that he will present ministers this morning with a report predicting that the EC economy will grow by only 1.25 per cent in 1992, and will stage no recovery in 1993. 'For the first time in five years,' he said, 'the European unemployment rate is over 10 per cent.'

Treasury sources confirmed yesterday that the ministers' discussion of the economic situation will be moved almost to the top of the agenda to take account of the turbulence in financial markets this week and French polls predicting a 'no' vote in the coming referendum.

Some of the ministers hope to press their colleagues at the meeting this morning to draw up a secret contingency plan that could be used to restore confidence in financial markets if the French do vote on 20 September against ratifying the Maastricht treaty.

There are growing complaints, however, that it is Germany's monetary policy, rather than French opinion polls, that is at

the root of the EC's economic problems.

Bertie Ahern, the Irish Finance Minister, has already complained that high German interest rates are 'seriously retarding' the European economies, and is likely to press for a robust discussion of interest rates this morning.

Italy's decision to hoist its main interest rate by 1.75 per cent yesterday underlines the degree to which other EC countries are being forced to keep money tight in order to support their currencies inside the agreed exchange-rate bands of the European Monetary System (EMS).

The official position of EC finance ministers remains that there is no need for a realignment. But the disappointing performance of the pound in the financial markets yesterday afternoon could mean that, even after Norman Lamont's decision on Thursday to borrow pounds 7.25bn in foreign currency, the Chancellor may yet be forced to raise interest rates in defence of sterling.

'We now have to calm the nerves and wait and see the result of the French referendum,' said Mr Christophersen yesterday. 'If it's a yes, there will be a positive reaction in the markets. If no, all 12 countries of the EC will have to make up their minds what to do. But I think they should go ahead with present arrangements.'

Mr Christophersen was referring to a statement which was issued by the ministers a week ago ruling out indefinitely a realignment of currencies in the exchange-rate mechanism of the EMS. All the 12 members of the Community except Greece are now part of the mechanism.

With their minds on French opinion polls and financial markets, the ministers will be hard put to concentrate on the other items that the British presidency has put on the agenda for the meeting in Bath.

All the same, Jacques Attali, head of the European Bank for Reconstruction and Development, will come to England to plead for fewer restrictions to

be levied on imports from the more fragile economies of Eastern Europe.