The European Commission yesterday sharply reduced its 1999 growth forecast for the euro-zone, triggering French-led calls for lower interest rates and a co-ordinated effort to stimulate demand in the European Union.

Speaking after the Commission revised its forecast from 3.2 per cent to 2.6 per cent, Mr Lionel Jospin, French Prime Minister, said a cut in interest rates in Europe was "essential" and urged governments to boost investment.

Mr Jospin added: "We must be sure that that the launch of the euro (on January 1st, 1999) does not lead to an undervalued dollar."

His remarks reflect a growing view among the mostly left-of-centre governments that Europe needs "New Deal-style" policies to create jobs, counter the threat of a global slump and offset the impact of a weaker dollar.

Mr Mario Monti, the influential EU commissioner in charge of the single market, added his weight to the neo-Keynesian mood in Europe's capitals ahead of this weekend's EU summit in Austria.

He called for a looser interpretation of the stability and growth pact - the cornerstone of the commitment to enforce fiscal discipline among the 11 members of the single currency zone.

In a confidential letter to his Brussels colleagues, Mr Monti said there should be a recognition of the difference between expenditure and investment when the European Commission examines whether individual countries run excessive deficits. If implemented, the proposals would give European governments greater leeway to run deficits of more than 3 per cent - the ceiling set by the pact - as long as the deficit was caused by public investment.

Mr Monti wrote: "The Commission must raise its profile as an institution which promotes policies in favour of future generations." Commission officials said his comments underlined a realisation among EU governments that there needed to be greater political control over macro-economic policy to counter the power of the independent European Central Bank in Frankfurt.

This so-called "economic policy co-operation" will be top of the agenda at talks today between Mr Oskar Lafontaine, the German Finance Minister designate, and Mr Dominique Strauss-Kahn, French Economy Minister.

Mr Yves-Thibault de Silguy, the European economics and monetary affairs commissioner, yesterday gave an upbeat interpretation of the Commission's economic forecast, promising a rebound in the 2000. He said the international economic turmoil was a "cold-weather front" that would hit Europe and dissipate.