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Gordon Brown today claimed that "internal German politics" were behind a scathing attack on his economic policies from one of the EU's most powerful finance ministers.
The prime minister also asserted that the Berlin government was pursuing policies similar to his, contrary to the claims made by the German finance minister, Peer Steinbrück.
But the Tories argued that Steinbrück's comments were very damaging to Brown because they showed that Tory concerns about his policies were shared by other politicians around the world – contrary to what Brown has been saying.
Steinbruck criticised Brown for adopting "crass Keynesianism" in an interview with Newsweek magazine on the eve of today's EU summit in Brussels, where a Europe fiscal stimulus plan will be discussed.
The SPD finance minister, accused Britain of "tossing around billions" after years of lecturing the EU on the dangers of deficit spending. He also made clear Berlin's resistance to a fiscal stimulus when he mocked "our British friends" for cutting VAT.
He told Newsweek: "We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain's debt to a level that will take a whole generation to work off."
His comments came on the eve of a fresh meeting between the Treasury and Britain's high street banks in which Alistair Darling will urge lenders to pass on cuts in interest rates and increase credit flows.
Steinbrück, a key figure in Labour's German sister party, made clear that Berlin is still smarting from a decade of lectures by Brown as chancellor to fellow EU finance ministers.
He said: "The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.
"When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"
Today Brown told London's LBC Radio that Steinbrück was wrong to suggest such a wide gulf between London and Berlin.
"Actually the German government is investing more. They have just announced a fiscal expansion so that they can invest in public works and helping their banks and doing these sorts of things," Brown said.
"I do not really want to get involved in what is clearly internal German politics here, because they have a coalition in Germany with different political parties.
"The important thing is that almost every country around the world is doing what we have been doing."
Not taking such actions would mean "failing in the role of government", he said.
But the Tories said Steinbrück's comment "totally demolishes Gordon Brown's central political charge that only the Conservatives oppose his expensive and ineffective VAT measures".
"On the day he claimed to be saving the world, the world answered back," the shadow chancellor, George Osborne, said, mocking a slip of the tongue by the prime minister in the Commons yesterday.
Yesterday the Tory leader, David Cameron, tabled his own proposals for a draft parliamentary bill that would create a government guarantee for up to 10% of all business loans in Britain, worth £50bn.
Berlin's intervention shows it is still smarting after Brown invited Nicolas Sarkozy and José Manuel Barroso, the European commission's president, to London on Monday to discuss plans for an EU-wide €200bn fiscal stimulus plan.
Angela Merkel, the German chancellor who is wary of costly fiscal stimulus plans, did not attend the London meeting.
The Tories' national loan guarantee scheme will add to pressure on the government to announce fresh measures to boost bank lending. Figures from the Bank of England yesterday showed that mortgage rates have come down by far less than official bank rate in the past two months and that unsecured loans and overdrafts are more expensive than they were before the start of the credit crunch 18 months ago.
In the Commons, Cameron told Brown: "This recapitalisation scheme is not working. It needs to change if the banks are to start lending again. The prime minister keeps saying that everyone in the world has copied it, but no one has copied the details. He is lending to the banks at 12% and expecting them to lend out at 6%."
The government said the Conservatives would have to make £14bn of provisions against companies failing during the recession and said the measures announced in the pre-budget report were targeted, effective and costed.
Darling will next week announce changes to the terms of the credit guarantee scheme for banks in an attempt to ensure that the benefits of taxpayer support are passed on to lenders.
"I'm prepared to do more to free up lending," he told the Treasury select committee yesterday.
According to Bank of England data, the average interest rate on a standard variable rate mortgage stood at 6.39% in November, compared with a bank rate of 3%.
The spread of 3.39 percentage points was the widest since records began in 1995 because while bank rate came down by 1.5 points, the SVR mortgage fell by 0.52 points.
New tracker rates came down in November after rising sharply in October. Over the two months combined, new tracker rates fell 0.28 percentage points - a small fraction of the two-point drop in bank rate.
Michael Saunders, UK economist at Citi, said: "It is even worse for unsecured loans. Between July 2007 [just before the financial crisis erupted] and up to and including November 2008, the Bank of England cut rates by 2.75 percentage points.
"But over that period average interest rates for household overdrafts rose 3.11 percentage points, average credit card rates rose 0.83 points, the average interest rate of a £10,000 personal loan rose 1.84 percentage points and the average rate on a £5,000 personal loan rose 3.15 points. "All these unsecured personal interest rates are now the highest for several years.
- Gordon Brown
- Economic policy
- Tax and spending
- Labour
- Conservatives
- Germany
- Tax
- Global economy
- Economics
- Credit crunch
- Recession
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