ISSUE 1653 Saturday 4 December 1999 IF TONY BLAIR AND GERHARD SHCRODER ARE FIGHTING--- WHAT DOES THIS SAY ABOUT THE STRANGLE HOLD OF THE NEW WORLD ORDER?

COULD THERE BE PROBLEMS IN SHANGRILA?

Schröder blames Blair for collapse of euro By Robert Shrimsley and Anne Segall Germany sending the wrong signals, says euro bank

Is this a crisis for the currency? Traders had seen the dip coming City: German fury at Blair over tax 'intransigence'

TONY BLAIR'S dream of exporting his New Labour vision across Europe suffered a serious setback yesterday when Gerhard Schröder, the German Chancellor, blamed him for the collapse in the value of the euro and signalled that his country was now closer to France than Britain.

Click to enlarge The rift in Anglo-German relations came as the euro suffered the humiliation of falling below the value of the dollar yesterday. After days of hovering near parity it finally fell below the critical one dollar level, hitting $0.9990 in London before recovering to close fractionally above parity at $1.0011. Traders predicted the European single currency could fall further next week.

Mr Blair had seen the German leader as a key ally in his effort to convert the EU to Blairism and was working hard to create a new Anglo-German axis in Europe. Their relationship was clearly breaking down as Mr Schröder sought to shift the blame for the slump in the euro away from his own government. Wim Duisenburg, head of the European Central Bank, said on Thursday that the German government's interventionist industrial policy was undermining the image of the euro zone.

Yesterday, however, Mr Schröder was blaming Britain's decision to veto an EU-wide tax on savings, known as the withholding tax. He told the German Parliament: "I make no secret of the fact that I have little understanding for such blockade tactics that place national interest above the necessary European solidarity. This policy is damaging to Europe and, over the longer term, its [Britain's] own interests."

By contrast, he praised the relationship with France, saying: "Contrary to what one may read from time to time, Franco-German co-operation is constructive and, above all, it works." He added that Germany would continue to work in Europe "with France above all".

He said the tax issue would be the subject of intense discussions at the EU summit in Helsinki next week and he hoped Britain would make a "decisive move". His comments set the scene for what could be a highly confrontational gathering in Finland.

Mr Schröder received a rebuff from Downing Street. A spokesman said: "The Government's position on the withholding tax is clear, well known and will not change. The Government is not going to sign up to anything which threatens an important part of the City and which threatens jobs in this country and more widely."

Mr Schröder has distanced himself from his work with Mr Blair on developing the Prime Minister's "Third Way", which involves combining Left-wing social policies with market economic policies.

After a number of domestic setbacks, Mr Schröder has tried to win back support among the Left ahead of his party's annual congress next week by intervening in two major business deals. Mr Blair voiced concern at the German leader's opposition to Vodafone's hostile takeover bid for Mannesmann, the engineering and telecommunications firm.

Mr Schröder has also concerned European bankers through his willingness to pump money into the bankrupt German construction company Philipp Holzmann.

In Britain, Euro-sceptics seized on the euro's slide as evidence of its instability. Nick Herbert, of Business for Sterling, said: "We were told this would be a stable currency but it has devalued by 16 per cent against the dollar in less than a year. If we had joined the single currency we would have created instability for most of our trade and investment."

In the City, some economists argued that a weak currency would boost exports and growth in the euro zone. Others expressed concern at the impact on public confidence. Alison Cottrell, an economist at PaineWebber, said: "It is difficult to imagine a loss of confidence in the euro that would not have economic consequences." Michael Saunders of Salomon Smith Barney predicted that European interest rates could rise from three per cent to four per cent next year.