Paris keeps ECB under pressure pre-eurozone talks

PARIS (Reuters) - France said on Monday it hoped the latest rise in euro zone interest rates was a one-off, setting the stage for a meeting where European Central Bank chief Jean-Claude Trichet will explain the move in person to the bloc's finance ministers.

While politicians acknowledge that high fuel and food prices are a serious problem, Paris and Madrid, with some support from Berlin, fear ECB rate rises will do little to tame inflation and a lot to compound a downturn in economic activity.

France, which has just taken over the rotating presidency of the European Union, renewed its questioning of ECB strategy in a newspaper interview given by Economy Minister Christine Lagarde.

She said she was only "half satisfied" by the ECB's decision last week to raise its key rate to 4.25 percent from 4.0 percent as it would heighten an imbalance with the United States and keep the euro overvalued.

"It is reassuring to hear that a new rate rise is not planned for the next (ECB) meeting," Lagarde said in the interview in French daily Le Figaro, published on Monday.

"But the ECB's decision increases the imbalance with U.S. monetary policy," she added.

"With rates at 4.25 percent in Europe against 2 percent in the United States, we will stay with an overvalued euro and a weak dollar," said Lagarde.

Lagarde attends the euro zone meeting in Brussels later on Monday and will chair a second session on Tuesday when the talks are widened to all 27 EU countries.

SURPRISING DEFENDER

The ECB's rate hike was defended, surprisingly, by Italian Prime Minister Silvio Berlusconi, who has often criticised the bank's monetary policy as bad for economic growth.

""Right now, the most important thing is to fight inflation so I think this policy by the ECB, at this moment, is right," Berlusconi told reporters in Tokyo over the weekend.

But Spain, where a housing boom has turned to bust, makes no secret of its reservations about the collateral damage from the ECB's inflation-fighting strategy.

German Finance Minister Peer Steinbrueck urged the ECB to move carefully too, though his position wavers more than that of Paris because of Berlin's more fundamental fear of inflation.

In an interview broadcast on the Financial Times' website (www.ft.com) on Monday, Steinbrueck said there were pros and cons to higher interest rates, while recognising the risk from inflation, running at a record 4 percent in the euro zone.

"Inflation is a new phenomenon -- a stronger phenomenon than ever during the last two years -- that might have a very negative impact on domestic demand. That's one reason why I'd estimate our growth, for example, in the upcoming years (to be) not as strong as during the last two years," Steinbrueck said.

A recent ARD survey showed 85 percent of Germans are worried about inflation, which accelerated in Germany to 3.3 percent in June -- its highest level since December 1993.

"But nonetheless there are some downside risks, and nobody can neglect these downside risks," he added. "Our domestic demand is our weaker leg, export activities are very successful," said Steinbrueck.

EXPENSIVE OIL

Euro zone ministers are also expected to discuss whether to cut taxes to ease the pain of expensive energy, a topic to be debated at length by all EU 27 finance chiefs on Tuesday.

EU ministers agreed in 2005 to avoid lowering taxes in response to higher energy costs. But while everybody still agrees that the excise tax should not be touched, opinions vary on selective cuts of value-added tax.

At a request of France, EU leaders have told the executive European Commission to prepare a report on the issue by October.

The French proposal met broad opposition at the leaders' summit last month and EU Monetary Affairs Commissioner Joaquin Almunia argued against it in an interview published on Monday.

"We cannot tell consumers to consume less and make products very cheap. Prices serve to send signals to consumers," Almunia told daily La Tribune.

(with reporting by Francois Murphy in Paris and Paul Carrel in Berlin; editing by Victoria Main)