The two-day talks, in Potsdam, outside Berlin, are expected to cover EU reform and the launch of the European single currency, but observers will be keen to gauge the health of Franco-German relations.

The friendship between France and Germany is seen as key to European integration, and since his election in September, Gerhard Schröder has tried to show he cares greatly about good relations with France.

BBC Berlin Correspondent Janet Barrie says there were concerns that the Anglophile German chancellor was nurturing closer ties with London at the expense of Paris.

French concern

Mr Schröder's first foreign trip after taking office was to London for talks with UK Prime Minister Tony Blair.

However before that he had visited France as chancellor-elect, and the French Foreign Minister, Dominique Strauss-Kahn, has described the new German Government as more practical and less sentimental than the previous one led by Helmut Kohl.

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Observers say there are obvious similarities between Mr Schröder's centre-left coalition and the Socialist-led French Government of Prime Minister Lionel Jospin, on issues such as employment policy.

Germany takes over the presidency of the EU in January, when the European single currency is due to be launched. Both sides have stressed the importance of healthy Franco-German relations.

However, there are expected to be points of disagreement in Potsdam this week.

Germany has demanded a reduction in its net payments to the EU budget while France has repeatedly resisted proposed cuts in agricultural subsidies.