France and Germany paper over economic policy cracks

By Paul Carrel

PORTO, Portugal (Reuters) - Senior French and German ministers tried on Saturday to play down strains in their ties, heightened after France's president touched a nerve in Berlin by taking a fresh swipe at the European Central bank.

French President Nicolas Sarkozy's comment that he "found it curious" the ECB had not cut interest rates struck anew at the heart of Germany's belief in central bank independence and keeping a tight lid on inflation.

The remark, made in an interview with newspaper Le Monde, put French Economy Minister Christine Lagarde on the defensive at a meeting in Portugal of European Union finance officials, many of whom took exception to Sarkozy's stance.

Lagarde highlighted France and Germany's work together to reach a deal on an EU treaty, and said EU finance officials at the meeting welcomed a proposal agreed by Sarkozy and German Chancellor Angela Merkel on tackling financial market turmoil.

"I say this for those of you who might have doubts about the effectiveness of the Franco-German axis," she said.

"The president is right to raise the question of interest rates," Lagarde added in response to one of many questions on the ECB issue at a news conference after the meeting. "There is a debate, we must not retreat from debate, there are no taboos."

But questioning ECB policy is almost taboo in Germany, where the memory of hyper-inflation between World Wars One and Two has left most politicians agreed that the central bank should be left to do what it takes to keep prices stable.

Sarkozy has repeatedly assailed the ECB for not doing enough to promote economic growth. With ECB independence so dear to the Germans, the issue risks holding back the Franco-German "motor" that has traditionally driven progress in the EU.