FRANKFURT, April 25 - Tension between Europe and the U.S. hasraised the stakes for a meeting between the world economic leaders in Washingtonthis week and will test their co-operative spirit at a crucial moment for globalgrowth. Verbal sparring between U.S. Treasury Secretary Paul O'Neill and his Europeancounterparts over how to tackle the latest global economic slowdown has conjuredup memories of a similar transatlantic row 14 years ago. In 1987 a public spat between one of O'Neill's predecessors, James Baker, andGerman officials over the level of German interest rates was widely seen as one ofthe triggers for that year's stock market crash. Group of Seven finance ministers and central bankers gather on Saturday, inconnection with the spring meeting of the International Monetary Fund, to assessthe threat that a slowdown in the U.S. will become prolonged. The IMF, which will release its semi-annual World Economic Outlook onThursday, has slashed its economic forecasts sharply. The G7 comprises the U.S.,Japan, German, Canada, Britain, France and Italy. Open encouragement from O'Neill for the European Central Bank to cut interestrates has visibly irritated European officials in advance of the meeting. The strain is in stark contrast to the common ground forged at their meeting inPrague, when G7 central banks joined the ECB in coordinated intervention to propup the euro, and analysts predict behind-the-scenes fireworks when the two sidesmeet. "Once conditions reach the degree of tension which they clearly have, there is nosubstitute for a face-to-face exchange of views," said CSFB chief economist GilesKeating. "Then they'll agree to stop blasting each other in public," he said, adding the bestway to persuade the ECB to cut rates was to avoid the impression of externalpressure that the bank had no choice to resist in order to preserve its credibility. The dispute over the ECB's policy is also likely to reignite a long-standing argumentover the U.S. current account deficit, which Europe considers as major threat tothe global economy. Equity prices have been savaged by doubts over world growth and could sufferfrom further confrontation, rekindling memories of the events of 1987.
ECB CHALLENGE
This time the refusal of the ECB to ease monetary policy to aid a U.S.-drivenworld slowdown has got up the noses of the new Bush administration. Washingtonis openly annoyed that Europe is not pulling its weight after a decade in which theU.S. acted as the world's economic locomotive. The ECB is alone among G7 central banks in resisting interest rate cuts this year.The Federal Reserve started the ball rolling and has eased four times since going onrecession alert in January. The ECB defends the decision by arguing that inflation risks still lurk in the 12nation common currency zone and that growth levels remain robust -- an argumentwhich O'Neill said last week had left him 'mystified'. But Swedish Finance Minister Bosse Ringholm, who currently chairs the Europeancouncil of finance ministers, on Tuesday chided O'Neill for ignoring the region'sprogress on economic reform while Britain's finance minister Gordon Brown calledfor reconciliation: "This is not a moment for retreating from global economic cooperation or losingfaith in its efficacy," he said in the text of a speech delivered to the European Bankfor Reconstruction and Development in London. "I believe that as we meet in Washington this weekend the approach of all of usshould be forward looking and outward looking: all countries affirming they willtake all the necessary actions to sustain growth," he said. ECB President Wim Duisenberg said on Saturday that O'Neill's view of Europewas 'misconceived'. He can be expected to launch a spirited defence of its monetary policy afteraffirming a common front with European finance ministers at a meeting in Malmo,Sweden that the region would overtake U.S. growth this year.
INFLATION HURDLE
The IMF and OECD have both urged the bank to cut rates but the ECB'sreluctance was supported this week by data from Germany and Italy that showedgrowing inflation pressure. The bank's mandate is to ensure price stability and it has defined this as an inflationrate between zero and two percent. Inflation in March was 2.6 percent and thiscould rise further due to energy costs, the impact of the weak euro and the falloutfrom a food scare caused by mad cow and foot and mouth disease. This stringent target may puzzle officials in the U.S., who have tolerated higherprices in pursuit of growth. But officials from Germany have made it plain that theFed's remedy for economic woe was by no means beyond reproach. "The efforts of the U.S. authorities to stabilise growth are understandable but thequestion is whether this will not prevent or delay the necessary adjustments," said asource at the German delegation heading to Washington for the spring IMFmeeting. He was referring to the massive U.S. current account deficit, accumulated during adecade of growth as a rampant U.S. economy sucked imports in from all over theworld, and warned that there was a risk the Fed might make the matter worse. "There is also a question whether the timing and size of the rate cuts will not lead toa new bubble and prevent the (current account) adjustment," the source said.