UPDATE 1-Clegg says time to shift UK economy up a gear

BERLIN Thu May 24, 2012 12:23pm EDT

BERLIN May 24 (Reuters) - British Deputy Prime Minister Nick Clegg said on Thursday that data showing Britain's economy shrank more than expected in the first quarter underlined the need to accelerate efforts to free up investment and credit.

Britain's economy, in its second recession since the 2007-08 financial crisis, contracted by 0.3 percent between January and March, Thursday's data showed, following a slump in construction output.

"The revision of the growth figures for the first quarter was very disappointing," Clegg said during a visit to Berlin.

"I think it is the moment to really shift up a gear to ensure that, as we maintain market confidence in our plan to balance the books and rid the UK of its structural deficit, we do more to ... act as a guarantee to mobilise more investment in infrastructure and housing and get more credit to the real economy," Clegg said between meetings with German officials.

"There is clearly a demand issue in the economy," he said.

The International Monetary Fund this week warned about the risks facing Britain and urged policymakers to boost growth by whatever means necessary.

Clegg's visit included an unscheduled meeting with German Chancellor Angela Merkel where they discussed the European Union summit on Wednesday and her opposition to common euro zone bonds as championed by the new French president, Francois Hollande.

Euro zone outsider Britain has argued for such commonly-issued bonds in the single currency area, a view reaffirmed by Clegg on Thursday.

"Every monetary union in the world has accompanying fiscal and adjustment measures along with a single interest rate," said Clegg.

"I understand how difficult the politics is, I totally get that in Germany where taxpayers have been immensely generous (financing euro zone bailouts) this is an enormously difficult issue," he told reporters.

The British deputy leader also met Finance Minister Wolfgang Schaeuble and other members of Merkel's cabinet and said they had discussed proposals pushed by France, and to a lesser degree by Germany, for a financial transactions tax to help assuage the damage of the euro zone debt crisis.

Britain firmly resists having such a tax on an EU-wide basis and Clegg said that even the European Commission, which proposes the tax, had released a study showing it could destroy hundreds of thousands of jobs in the financial industry.

Clegg is leader of Britain's Liberal Democrats, coalition partners of Prime Minister David Cameron in the Conservative-led government which argues that such a tax would go against the interests of the City of London as a financial centre.

"When you're struggling to create jobs it would be illogical to introduce a measure whose own proponents say would create unemployment on that sort of a scale," said Clegg.

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