German and French economies in decline

Finance ministers from the world's seven leading industrialised nations meet in Bonn today against a background of grim economic news and signs that Europe's two biggest economies are running out of steam. The ministers will discuss ways of promoting global economic growth and reforming the world's financial architecture.

Figures published yesterday suggest that the economic situation in Germany and France is even worse than analysts believed and there is little prospect of a recovery in the near future.

Germany's economy shrank by 0.4 per cent during the last three months of 1998 and French industrial production fell in December by 1.6 per cent from the previous month. The figures came as a shock to economists, who expected the slowdown in Europe's industrial sector to bottom out and that an improvement in export markets would put the economies of the euro zone back on track for growth.

The closely-watched German Ifo institute business survey, also published yesterday, offered no signs of a turnaround, with the key west German business climate index slipping in January to 91.1 from 91.4 in December.

While many economists expected financial crises in Asia and Russia to depress European economies at the end of last year, the scale of the decline in Friday's data came as a surprise.

Economists said French production numbers, coming after similar German and Italian data, also confirmed the Europe-wide yearend slowdown. The French statistics office also revised down November output data.

The United States Secretary of Treasury, Mr Robert Rubin, predicted that the finance ministers would spend much of today's meeting discussing the difficulties faced by European and Asian economies.

"I am sure we will be discussing how Japan and Europe plan to move forward on growth in their economies. This is critical to the prospects for recovery in the emerging economies," he said.

In contrast, the US economy is looking relatively robust, with an outlook for reasonable economic growth and low inflation.

The ministers will also discuss a report by the Bundesbank president, Mr Hans Tietmeyer, on how to improve the supervision of international financial markets. Mr Tietmeyer is expected to propose the setting up of a Financial Stability Forum to improve co-ordination between national financial authorities, international financial institutions and international regulatory bodies.

In another move to reform the global financial architecture, ministers will seek to improve the International Monetary Fund's statistical information on individual economies. Analysts believe that some of the recent economic crises in Asia and Latin America might have been less severe if more was known about the true state of national economies.

The German Finance Minister, Mr Oskar Lafontaine, will propose the establishment of target zones to limit exchange rate fluctuations between the euro, the dollar and the yen. France and Japan support the proposal but the United States, Britain and the president of the European Central Bank, Mr Wim Duisenberg, are determined to block it.

The German government yesterday expressed regret that the EU Commission would not be sending a representative to today's meeting. The Finance Commissioner, Mr. Yves-Thibault de Silguy refused to send an official to the meeting after the US, backed by Bonn, insisted that the commissioner himself would not be welcome.

Mr de Silguy claims that Bonn is going back on a deal agreed at the EU summit in Vienna last December, under which a member of the commission would be part of the German delegation. Mr Lafontaine insists that, in view of Washington's refusal to accept high level EU representation at the summit, inviting a commission official to take part was the best possible compromise.