Wim Duisenberg, the European Central Bank president, opened up a rift over economic policy at the heart of the euro-zone as the single currency fell below parity with the dollar for the first time.
Mr Duisenberg criticised the German government for trying to rescue the construction group Philipp Holzmann, saying: "It does not enhance the image that we want to have of being an increasingly market-driven economy across the euro area."
Doubts about the direction of economic policy under Gerhard Schroder, Germany's Social Democratic chancellor, have been partly responsible for the euro's recent weakness against the dollar, according to foreign exchange analysts. It traded as low as $0.9997 last night before recovering to $1.0008.
Mr Duisenberg's comments, made in Frankfurt, amounted to one of the sharpest public criticisms that the ECB has made of a national government's policies since the central bank assumed responsibility for monetary policy in the euro-zone last January. They also exposed a philosophical rift in Europe between those forces pressing for more open markets and those defending a model of consensus capitalism exemplified by Germany.
Mr Duisenberg declined to elaborate on his criticisms, saying: "What I have to say to the German government, I would rather say to the German government directly."
But his remarks reflected a widespread view in financial markets that the government's pledge of DM250m ($129m) in taxpayers' money for Holzmann was a setback for reform in Europe's largest economy.
Hans Eichel, German finance minister, has strongly defended the decision to help Holzmann, saying that such interventions are everyday practice in Germany at local government level.
But the government's critics regard the Holzmann decision as a retreat from Mr Schroder's promises to pursue pro-business policies and a blow to free market principles in the European Union. Concern about the implications of the Holzmann bail-out has risen in financial markets this week since the German building workers' trade union, IG Bau, warned it might reject wage cuts proposed under the deal.
Representatives of Holzmann's employees agreed last week to accept wage cuts of 6 per cent and a longer working week of 43 hours, but IG Bau said such terms might infringe its collective bargaining contracts.
Holzmann's competitors are also unhappy with the proposals, saying they might enable Holzmann to undercut them in tenders for building projects.
Mario Monti, the EU's competition commissioner, said in Berlin that the Holzmann rescue package would be investigated "strictly according to the guidelines for rescue and restructuring aid". He urged the German government to notify Brussels formally of its plans "as a matter of urgency", and added: "Any decision cannot be taken by Germany before the Commission ruling."
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