Europe wrangles over stimulus as gloom gathers

12th December 2008, Comments 0 comments

German Finance Minister Peer Steinbruck soured the mood when he told Newsweek magazine on the eve of the meeting that British Prime Minister Gordon Brown had adopted "crass Keynesianism" by borrowing money to finance state spending.

Brussels -- European nations wrangled over the best way to beat the global recession on Thursday as a key US auto industry bailout package faced a tough vote in the Senate.

Tensions over attempts to boost the European econony broke into the open as EU leaders met for a summit in Brussels where they were to discuss proposals from the European Commission for a 200-billion-euro (260 billion dollar) stimulus package.

German Finance Minister Peer Steinbruck soured the mood when he told Newsweek magazine on the eve of the meeting that British Prime Minister Gordon Brown had adopted "crass Keynesianism" by borrowing money to finance state spending.

"The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking," Steinbruck said.

Germany has faced intense pressure from Brown, French President Nicolas Sarkozy and European Commission chief Jose Manuel Barroso to boost domestic consumption, but has refused to indulge in borrowing and deficit spending.

Brown dismissed the criticism and said the comments were "internal German politics" and German Chancellor Angela Merkel said as she arrived in Brussels that "we support the European Commission's initiative."

In the United States, the White House said there was a "realistic" chance of Senate passage on Thursday of a 14-billion-dollar government lifeline for the US auto industry despite Republican opposition.

US President George W. Bush was courting wary lawmakers on behalf of the embattled legislation, which cleared the lower House of Representatives on Wednesday and faces a vote in the upper chamber Senate on Thursday.

President-elect Barack Obama stressed that Washington "should provide short-term assistance to the auto industry to avoid a collapse while holding the companies accountable and protecting taxpayer interests."

"The legislation in Congress right now is an important step in that direction. And I'm hopeful that a final agreement can be reached this week," he said.

In Sweden, the government announced a 28-billion-kronor (2.65-billion-euro, 3.5-billion-dollar) package to help its beleaguered automotive sector, including carmakers Volvo and Saab.

The measures "will take the form of increased investment in research and development and state credit guarantees for raising loans (from) the European Investment Bank," the government said in a statement.

Volvo Cars is owned by Ford while Saab Automobile is owned by General Motors which has warned it could run out of money in the next few months without state aid.

World stocks were mixed.

In Europe, the London FTSE 100 index rose 0.49 percent to 4,388.69 points, but in Paris the CAC 40 fell 0.43 percent to 3,306.13 while the Frankfurt Dax lost 0.78 percent to finish at 4,767.20.

In the US, the Dow Jones Industrial Average edged up 0.18 percent to 8,777.35 at 1615 GMT.

Japan's benchmark Nikkei-225 index gained 0.70 percent, rising for the fourth day in a row, while Hong Kong closed 0.2 percent higher, but Sydney was 1.2 percent down.

In Asia, woeful new data painted an increasingly gloomy picture of the regional economy.

The Asian Development Bank said growth in Asia's developing economies will slow to 5.8 percent in 2009, from a previous estimate of 7.2 percent, and that regional governments must boost domestic demand to counter a deeper slowdown.

"Developing Asia -- which initially looked well positioned to weather the global crisis -- has come under increased pressure," the ADB said in a special report monitoring the crisis.

"Weakening demand for manufactured goods in major industrial countries means declining export orders from Asia, with knock-on effects for industrial production," the report said.

In China, inflation dropped to a 22-month low of 2.4 percent in November from 4.0 percent in October, the government said. Analysts said the data raised the prospect of deflation -- a decline in prices, which can increase unemployment.

Falling exports by South Korea, also contributed to a surprise move by the central bank to cut its key interest rate to a record low.

The Bank of Korea lowered its benchmark rate by an unprecedented 100 basis points to three percent, the fourth reduction in just over two months.

Elsewhere on Thursday, Switzerland's central bank slashed its benchmark interest rate by half a percentage point to a range of zero to 1.0 percent and the South Africa Reserve Bank lowered its benchmark interest rate by a half-point to 11.5 percent.

Taiwan's central bank announced it was lowering interest rates by 75 basis points, the biggest cut in 26 years and the fifth in two months, in a bid to lift the economy during the downturn.

Beginning Friday, the discount rate will be lowered from 2.75 percent to 2.00 percent, the central bank said in a statement.


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