'US policies threaten recovery'

RELATIONS between America and Europe have come under fresh strain following stinging criticism of the US budget and trade deficits and its return to protectionism. European Central Bank chief Wim Duisenberg and Germany's central bank said the policies could jeopardise global economic recovery.

'The re-emergence of the so-called twin deficits in the US is a source of concern,' Duisenberg told a European Parliament committee. He said a hefty budget deficit had re-emerged, despite a pledge by the previous US administration to eliminate it over 10 years.

'That, together with the huge deficit of the current account, adds to the assessment of the uncertainties that we feel about the future development of output and prices, including exchange rates.'

The Bundesbank weighed in to the debate, saying in its monthly report that the US was also a source of 'considerable' risks to global upswing. It singled out America's high trade deficit and its move towards more protectionism.

The attack comes days after the Organisation for Economic Co-operation and Development delivered an unprecedented rebuke to the US that its protectionist measures on farming and steel could poison the new round of trade talks. The OECD, made up of 30 wealthy nations including the UK, was joined by the International Monetary Fund, the World Bank and the World Trade Organisation in voicing concerns that Washington's actions could set off a chain reaction of worldwide protectionism that would particularly hurt developing countries.

The US has imposed tariffs of 30% for up to three years on steel imports, saying it was needed to safeguard its steelmaking industry. The European Union is proposing to impose $583m (£400m) of tariffs on various US imports in retaliation. In addition, President Bush signed a law last week that opponents say will deliver $180bn of subsidies to US farmers. The EU says this will depress world food prices, making it harder for poor countries to compete and easier for US farmers to export to them.

Duisenberg also fuelled speculation that the ECB will lift interest rates on 6 June. He told the committee: 'The evidence has made us confident that a recovery is under way in the euro area. At the same time, recent developments in consumer price inflation in the euro area have been less favourable than we expected.'