Chirac opposes Bonn's stability scheme for euro

President Jacques Chirac of France yesterday poured cold water on proposals by the new German socialist-led government to introduce target zones for the euro to protect the single currency from instability.

Though speaking as head of state, Mr Chirac's remarks, made at a speech in Zurich at the end of an official two-day visit to Switzerland, could complicate relations between France and Germany. Discussions are under way between France's government led by Mr Lionel Jospin and the Bonn coalition led by Chancellor Mr Gerhard Schroder on a Franco-German position on the euro and on moves to improve the stability of the international financial system.

Mr Chirac said: "One cannot legitimately call for world financial stability and advocate exchange rate instability at the same time. We can make exchange rate relationships more stable. This is a difficult and demanding task. It is up to us to progress together, and rapidly."

This was taken as criticism of the calls by Mr Oskar Lafontaine, the new German Finance Minister, to introduce target zones to protect the euro against currency fluctuations.

Presidential aides are concerned such an approach would alienate the US and complicate a consensus within the Group of Seven leading industrial nations to exchange rate policy. Mr Chirac spoke as worries about the European economic outlook intensified after data published yesterday showed inflation in the 11-country euro zone at a record low in September.

This prompted a warning by a German official that the German economy was on the verge of deflation. Mr Heiner Flassbeck, state secretary in the German finance ministry, renewed his call on the Bundesbank to reduce interest rates. "We are very close to a deflationary situation," he said.

Mr Chirac pleaded for a more pragmatic approach to exchangerate policy, which would involve discussions with the US and Japanese authorities on the respective values of the dollar and yen.

He also warned that, while the euro was currently protecting Europe from instability, "we should not demand of a currency more than it can give".

With his intervention Mr Chirac has thrown his weight behind Europe's central bankers, who are hostile to target zones, and who have come under pressure to lower European-wide interest rates.

The annual increase in the harmonised consumer price index for the euro zone fell from 1.2 per cent in August to 1 per cent in September. It was the lowest rate of increase since the data series started in 1996, according to Eurostat, the European Union's statistics office.

The governing council of the European Central Bank, due to meet in Frankfurt on Tuesday, is not expected to yield to the pressure for lower rates.