Countries across Europe will be encouraged to follow Britain's lead in borrowing massively to fund a stimulus to beat the slump as part of an EU recovery plan worth at least €130 billion.

The European Commission will propose generous flexibility in rules that currently restrict public deficits to 3 per cent of GDP to allow tax cuts and investment to tackle the financial crisis in a co-ordinated response to the economic crisis.

It is also expected to relax strict anti-state aid rules to allow European countries to offer greater financial assistance to ailing industries, while the European Investment Bank is likely to come up with soft loans targeted at the car and construction industries.

The move follows the Federal Reserve's $800 billion plan to unblock American credit markets.

Christine Lagarde, France's finance minister, said last night that the plan could exceed €130 billion. She said: “We absolutely have to continue repriming the finance pump“

She added: "The measures have to be targeted so that after the two years, when we have got out of the crisis period, we can get back to the principles of managing public finances, controlling and reducing deficits, reducing public debt”.

Angela Merkel, the German Chancellor, and President Nicolas Sarkozy of France said today in a joint newspaper article that the €130 billion plan was a “good target”, but said there was no one-size-fits-all solution and appealed for a relaxation of the European Union rule restricting public deficits to less than 3 per cent. They argue that it is impeding governments’ abilities to react to the economic downturn.

Ms Merkel and Mr Sarkozy wrote : “There is no single model for recovery that can be applied to the 27 member states with very different budgetary and economic situations.

“But, we believe that the co-ordinated budgetary stimulus can restore the confidence of consumers and investors and prevent opportunistic actions between states which share much more than institutions.”

The article emphasised the global steps that had already been taken by the G20 gathering of the world's major economies. It stated: “After the explosion of the subprime bubble, the contagion has spread to every economy in the world, whether developed or emerging.

This global crisis calls for a global response. The leaders of the world’s 20 major economies have therefore agreed upon common principles and an action plan.”

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