EU Must Work With Us to Combat Recession, Says Barroso

The EU should offer the incoming administration of US president-elect Barack Obama a Transatlantic economic pact to combat the global recession, Jose Manuel Barroso, European Commission president, said yesterday.

Calling for a joint EU-US stimulus program, Barroso said: "That would be a good objective. Why not, after the new administration comes in, articulate a common Transatlantic response to the economic crisis which could be the basis for a global response?"

The EC president said this week's EU summit, starting on Thursday, was a "credibility test" for Europe, and urged the 27 leaders to endorse commission plans for a ?200bn (?175bn) stimulus package and ambitious measures to fight global warming.

His call came a day after the prime minister, Gordon Brown, and the French president, Nicolas Sarkozy, renewed pressure on the German chancellor, Angela Merkel, leader of Europe's biggest economy, to adopt a more generous stimulus package than so far proposed.

Barroso insisted the summit agree on a target of 1.5% of the EU's GDP as the core of the stimulus package. That would imply a boost of ?200bn on EU combined output of $16.62tn in 2007, according to CIA estimates.

But sources indicated that the 27 leaders, who could extend their two-day meeting into Saturday because of widespread divergences on the economy and climate change, will refuse to stipulate that target.Germany, with a budget deficit close to zero, has so far adopted a modest programme of investment in infrastructure, green technology and tax breaks for clean cars worth as little as ?12bn over two years.

Leaders of the grand coalition of Christian and social democrats are resisting intense domestic and overseas pressure for generous tax cuts to persuade the notoriously thrifty Germans to increase household spending.

Brown has made cuts in VAT the centerpiece of his ?23.5bn program to boost consumer spending, while Sarkozy's ?26bn plan focuses on investment projects.

German political leaders and analysts argue that the country's savings ratio is already close to 12%, compared with virtually zero in the UK, and local consumers would simply hoard the extra cash. But some ministers, industrialists and bankers are expected to call for tax cuts and other counter-cyclical measures at a summit Merkel has called in Berlin on Sunday. No decision is expected.

A senior German diplomat said that, with the economy expected to contract between 0.8% and 1.2% next year, Merkel could announce a more far-reaching stimulus package, including tax cuts, when grand coalition leaders convene in early January.

Barroso insisted that Merkel and he were "on the same lines" by agreeing that Europe should not spend its way out of the crisis.

Acknowledging the historical basis for Germany's fiscal prudence, he said: "But, if there's something we can do together, I'm sure Germany will be at the rendez-vous."

Barroso pointed out that Germany's manufacturing industry was bigger than that of Britain and France combined and was heavily reliant on exports.

"If Europe goes into a deep recession, Germany will be heavily affected," he said.

He, too, expects Germany to draw up a more ambitious stimulus package in the new year even though Peer Steinbrueck, the federal finance minister, has said this may have to wait until after Obama's January 20 inauguration ? or even Easter.

Barroso said Obama had already adopted key elements of the EC programme by setting priorities such as green jobs, infrastructure, innovation and energy efficiency and proposing a "cap-and-trade" scheme to cut greenhouse gas emissions.

So far the US president-elect has indicated that, despite a budget deficit approaching $1tn, his administration would earmark around $500bn for spending on the biggest infrastructure program since building new highways in the 1950s. That would be two-and-a-half times more, proportionately, of a $13.84tn economy than the EU's 1.5% of GDP.

Barroso indicated that, if this week's summit agrees, the EU should propose both a joint economic program and Transatlantic carbon market to Obama.

His aim is to secure ratification at the G20 summit hosted by Brown in London on April 2 ? and invite others to join in.