Angela Merkel today joined the rest of the EU in signing up to an €200 billion rescue plan for Europe’s economy – as the British ambassador in Berlin complained formally about her finance minister’s outspoken criticism of Gordon Brown’s VAT cut.

Mrs Merkel, the German Chancellor, gave her support to an EU-wide recovery plan across the 27 member states, suggesting that she is planning to increase the level of tax cuts in Germany in the New Year as the recession deepens.

Jose Manuel Barroso, the President of the European Commission, called for talks with the incoming US administration of Barack Obama to coordinate a trans-Atlantic plan to bring the world out of the downturn.

The wording of the EU commitment was watered down during negotiations to give more cautious countries like Germany extra leeway, with the final pledge amounting to “around” 1.5 per cent of EU GDP instead of “at least” that figure.

But Mr Brown hailed the outcome as a vindication of his response to the downturn and as a rebuff to Peer Steinbruck, the truculent German finance minister who called the British plans “crass” because they would lead to a massive increase in the UK’s deficit.

In a magazine interview, Mr Steinbruck warned against “tossing around billions” and said that Britain’s VAT cuts would fail to stimulate spending and cause an increase public borrowing that would take a generation to pay off.

The row between Britain and Germany rumbled on today with Foreign Office confirmation that Sir Michael Arthur, the ambassador in Berlin, had telephoned the German finance ministry to “express his disagreement” with Mr Steinbruck’s undiplomatic attack on British policies.

The formal protest evoked memories of 1992 when Britain criticised comments from the then Bundesbank president for precipitating sterling’s ejection from the Exchange Rate Mechanism.

Mr Brown sought to draw a line under the clash by declaring that all the EU nations were united in agreeing that a sizeable fiscal stimulus was needed to tackle the recession.

“This agreement is the answer to all the talk of the last few weeks - Europe is united and I am not getting into German domestic politics,” said Mr Brown, in a reference to the internal debate in Germany over how much public money to spend trying to beat the recession.

In Germany’s left-right coalition, Mr Steinbruck is a leading member of the Social Democrats while Mrs Merkel leads the Conservatives. They are entering an election year and beginning to campaign against each other.

Mr Brown added: “We will continue to reject the do-nothing approach and we will not stand by and let the recession take its course. Because it is coordinated action, agreed unanimously and happening simultaneously, it will have a bigger impact on jobs and growth.”

The EU summit called on banks to pass on recent cuts in interest rates and lend more money to companies. The European Investment Bank will release €30 billion in loans to increase lending for small businesses and for projects that support renewable energy and cleaner transport. This includes €4 billion in soft loans for the car industry to help with technology development to produce less pollution.

Several European nations are sliding into a recession and the 15 nations in the euro have already seen two quarters of negative growth this year. The final three months are not looking any better, according to figures the EU statistics agency Eurostat due to be published tomorrow.

Falling demand at home and abroad dragged down October’s industrial production figures in the eurozone by 5.3 per cent from a year ago, the biggest drop in 15 years. The entire 27-nation EU saw a 5 per cent drop.

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