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Cracks open in EU and US over rescue plans

  Cracks emerged in the global effort to drag the world out of recession on Thursday with Germany attacking Britain ahead of an EU summit for rushing into debt to bail out industries and pump up growth.

 

A proposed US auto industry bailout also headed for a clash, in the US Senate where there is Republican opposition. Deflation fears grew in China while South Korea and Switzerland slashed interest rates to keep their economies afloat. On financial markets, Wall Street looked set for a poor start after soaring jobless claims, while Europe’s FTSEurofirst was down 1.5%. Japan’s Nikkei earlier rose 0.7%.

In a move that suggested trouble ahead for concerted European and perhaps world efforts to end the financial crisis and restore global economic growth, Germany criticized countries for rushing into untested economic rescue packages. Finance Minister Peer Steinbrueck urged governments to pause before pledging to spend billions of dollars to try to push their economies out of trouble.

“The speed at which proposals are put together under pressure that don’t even pass an economic test is breathtaking and depressing,” he said in an interview with Newsweek magazine, published on the magazine’s website on Wednesday. He singled out Prime Minister Gordon Brown for particular criticism, accusing him of switching to economic policies that would saddle a generation with debt. “The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking,” he said.

Another German policymaker, European Central Bank Executive Board member Juergen Stark, also indicated concerns about responses to the crisis, saying late on Wednesday that the ECB does not have a lot of room for maneuver after its interest rate cut last week. The comments came as European Union leaders were to meet in Brussels to discuss a €200-billion stimulus package to wrench the bloc out of recession.

German Chancellor Angela Merkel said in Brussels that she was aware that Germany as an economic power had a responsibility to look over time at new stimulus steps. British Schools Minister Ed Balls, a former Treasury specialist and strong Brown ally, responded to Steinbrueck’s comments by saying Germany’s ability to respond to the global economic downturn was being hampered by domestic politics. “Once the politics in Germany is resolved they will be acting with us too,” he told Sky TV.

HURDLES

In a similar vein, the US automaker industry, reeling from financing pressures and a consumer slump, was seeking to secure a $14 billion rescue from Washington. The Democratic-controlled House of Representatives approved the bailout legislation on Wednesday. It would force US automakers to restructure or fail. But Senate Republican pressure could slow down passage of the measure or even block it.

Failure of any of the so-called Big Three carmakers -- Ford, General Motors or Chrysler -- would threaten countless more jobs and send shockwaves through the global supply chain. The latest US jobs data was also grim, with unemployment claims surging to a 26 year high.

Europe’s biggest clothing retailer, Zara fashion store owner Inditex, reported nine-month net profit up 4% at constant exchange rates, missing forecasts but pleasing analysts with an encouraging outlook for the fourth quarter. Finnish stainless steel maker Outokumpu cut its fourth-quarter profit outlook and said it would slash jobs and investments due to weak demand.

CHINA PRICES

Deflation pressures that are spreading through Europe and the United States also now appear to be threatening China, the world’s fourth-largest economy. Deflation, a drop in prices, tends to defer spending and makes it harder for governments to boost growth. China’s annual consumer price inflation fell to a near two-year low in November, a report showed on Thursday, a day after data reflected a collapse in wholesale prices and a startling drop in exports and imports.

The slowdown in inflation is partly due to a collapse in global energy and commodity costs, but also reflects demand-sapping recessions underway in Europe, Japan and the United States. Monetary authorities worldwide have been cutting interest rates sharply to try to get their economies moving but have had trouble persuading banks to lend more.

In the latest moves, Switzerland and South Korea cut rates by 50 and 100 basis points respectively. Korea took rates to 3.0%, the lowest since the current policy system was adopted in 1999. For Switzerland it was the fourth cut in two months. (Reuters)