France, Germany to adopt growth initiative, discuss Iraq

BERLIN, Sept 18 (AFP) - France and Germany, under heavy fire for breaching the EU single currency rules they helped set up, prepared to hit back Thursday at talks here with a joint initiative designed to stimulate growth.

The high-level meetings, co-chaired by German Chancellor Gerhard Schroeder and French President Jacques Chirac and including senior ministers, were also set to touch on the situation in Iraq and upcoming EU reforms.

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But what the governments were touting above all was a declaration they hope will stimulate economic growth and investment and could act as a template for the whole European Union.

By focusing on growth rather than tackling their public deficits, however, they risk angering other euro-zone nations which have made painful reforms to comply with the criteria.

Thursday's talks will allow Schroeder and Chirac, who like to present their axis as a driving force in Europe, to coordinate strategy ahead of a series of key dates in the next few weeks.

On Saturday, the chancellor will again host Chirac, plus this time British Prime Minister Tony Blair, for talks on Iraq and EU matters.

Early next week he flies to the UN General Assembly in New York where he is hoping for his first direct talks with US President George W. Bush since they fell out over the US-led war on Iraq.

And early next month, the 25 current and future EU nations meet in Rome to finalise the bloc's constitution.

France and Germany are in the dock for breaching the pact underpinning the euro single currency specifying that public deficits should not run in excess of 3.0 percent of gross domestic product.

Not only did they breach the rule last year, they look almost certain to do so again in 2003, while the forecast for 2004 is barely any brighter.

It has sparked sharp criticism from smaller euro-zone states and financial institutions for Brussels to impose heavy penalties.

Nevertheless, the initiative expected to be unveiled Thursday is thought to foresee 10 investment projects in the sectors of telecoms, research, long-term development and transport.

They include linking France's high-speed TGV rail network to Germany's ICE and cooperation on the Galileo space project, although the accent would be on small and medium-sized businesses.

The declaration was not expected to specify costs. However, reports suggest they could amount to some three billion euros (3.38 billion dollars), financed by the European Investment Bank and public-private partnerships.

Schroeder, in an interview with the Handelsblatt business daily, said that "a temporarily higher deficit" was better than sticking rigidly to a budgetary consolidation strategy "that cripples any recovery tendencies."

"I want to emphasis that we're not giving up our consolidation goals. We'll simply have to stretch the timetable for the consolidation process."

France, too, has indicated that it sees growth as key to reviving economic fortunes.

Keen to deflect any criticism of a stitch-up by France and Germany, which were prime movers in forging the stability pact -- French Industry Minister Nicole Fontaine said Wednesday that the initiative would not exclude other EU partners.

On Iraq, the two countries want the United Nations given a greater role in its post-war reconstruction but appear to be inching toward a compromise with Washington on a UN resolution spreading the military and economic cost.

"What is important is there is a road map for a transfer of responsibility to an Iraqi civilian government," Schroeder told Handelsblatt.

"It cannot happen tomorrow, but it would be helpful if there were specific timeframes."

Although the French and German leaders meet regularly, Thursday's talks are the second of a planned series of expanded meetings begun by a treaty earlier this year sealing 40 years of Franco-German reconciliation.

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