Analysis: so is he right? | Profile: Peer Steinbrück | He's Merkel in disguise - Rosemary Righter

An extraordinary dispute between Britain and Germany on their rival approaches to the economic crisis overshadowed the start of the EU summit yesterday, laying bare deep divisions on the best way to rescue Europe.

The mud-slinging was started by Peer Steinbrück, the German Finance Minister, who called Gordon Brown’s plan to borrow heavily crass and depressing, and insisted that Germany would not follow calls to pump extra cash into a tax giveaway. Mr Brown’s response was to dismiss the attack as “internal German politics” because of a dispute within Berlin’s Left-Right coalition over whether to increase its fiscal stimulus to levels agreed by Britain and demanded by the European Commission in Brussels.

Angela Merkel, the German Chancellor, who is under pressure to preserve jobs in Germany, seemed last night to be facing both ways, agreeing to a modest recovery plan at home but telling her fellow EU leaders that she supported the Commission’s ambitious €200 billion (£177 billion) proposal put forward last month.

In a sign that tensions within the German camp were rising, Mr Brown found himself under fresh attack from conservatives in Ms Merkel’s party yesterday for allowing “uncontrolled financial markets” in London to rack up big losses and “a tremendous amount of debt”.

Last night Ms Merkel was quick to try to scotch any idea that Berlin would turn its back on the Commission’s economic stimulus package. Germany was “aware of its responsibility as a large economy”, she said on her arrival for the Brussels talks. “For us, it’s all about saving jobs in Germany.”

Silvio Berlusconi, the Italian Prime Minister, said later that broad agreement had emerged among the leaders about the need for the fiscal stimulus package. “We are all in agreement,” he said after dinner with his peers.

The earlier finger-pointing underscored the fault lines in Europe between those such as Mr Brown who believe in spending their way out of the downturn, and others such as Mr Steinbrück who are resisting calls to increase borrowing. The attack by Mr Steinbrück – from the left-wing Social Democratic Party, which is in coalition with Ms Merkel’s Christian Democrats (CDU) – delighted British Conservatives. In an interview in Newsweek magazine he ridiculed the British Government’s recovery plan, in particular the cut in VAT from 17.5 per cent to 15 per cent.

“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?” Mr Steinbrück said.

“All this will do is raise Britain’s debt to a level that will take a whole generation to work off. 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.”

Mr Steinbrück has a large degree of autonomy over economic policy under Germany’s grand coalition and is able to resist pressure to change course – even if it comes from Ms Merkel.

A spokesman said later that the Finance Minister had had no intention of criticising Britain, but the damage had been done.

Downing Street said that the Prime Minister did not see the comments as an attack on Britain but “more as an issue within Germany”. As if to prove the point, Michael Glos, Mr Stein-brück’s deputy, called for Germany to spend €25 billion on tax relief next year to stimulate the economy. His remarks came after a devastating projection from the Munich-based Ifo think-tank that German GDP would shrink by 2.2 per cent next year; this would represent Germany’s weakest annual economic performance since the Federal Republic was founded in 1949.

Steffen Kampeter, a CDU back-bench MP, renewed the attack on Britain last night in a partisan assault on Mr Brown’s policies as Chancellor and Prime Minister. “Peer Steinbrück’s comments have nothing whatsoever to do with internal German politics as Gordon Brown has suggested,” he said. “After years of lecturing us on how we need to share in the gains of uncontrolled financial markets, Labour politicians cannot now expect us to share in its losses.”

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