Pact ruling euro nations is stupid, says Prodi

Romano Prodi, the President of the European Commission, poured salt into one of the EU's most open wounds yesterday, by describing the economic rules that govern nations signed up to the European single currency as "imperfect" and "stupid".

In what was regarded as a clear gaffe, Mr Prodi voiced outspoken criticism of the so-called Stability and Growth Pact, which he described as necessary but in need of flexible interpretation.

His comments seem designed to offer an olive branch to France which has waged a lengthy campaign for countries to have more freedom to promote growth during economic slowdowns. But such blunt language from the man responsible for implementing the rules stirred a divisive debate and raised new questions about the credibility of the pact.

As Mr Prodi's intervention was assessed yesterday, the euro fell to a one-month low against the US dollar.

The 12 nations using the single currency signed up to the pact ahead of the euro's launch in 1999 to demonstrate their commitment to control finances in return for low interest rates. Those countries which breach a ceiling on budget deficits of three per cent of gross domestic product face censure and heavy fines.

But with the economic slowdown biting hard the pact has been strained to breaking point. In recent months, Germany, France and Italy, which together account for three-quarters of the economy of the euro zone, have been campaigning for a reworking of the rules. Countries which are close to balancing their budgets, ranging from Spain to Finland, insist the rules should not be diluted.

Portugal has already been criticised for exceeding the ceiling last year when its deficit climbed to 4.1 per cent. The Commission has given France, Germany and Italy more time to reduce deficits.

Mr Prodi's words could scarcely have come at a more delicate time, amid concern over Germany's ability to match requirements for membership of the euro. Although German ministers and bankers were the main architects of the 3 per cent deficit ceiling, Hans Eichel, the country's finance minister, conceded this week that Berlin will probably fall foul of the rule this year. Yesterday, Mr Eichel was forced to describe reports of a €14bn (£9bn) hole in Germany's 2002 budget as "wild speculation".

Mr Prodi, who is in Paris for a meeting the with French Prime Minister, Jean-Pierre Raffarin, told Le Monde: "The stability pact is imperfect – that's true – because we need a more intelligent mechanism and more flexibility but you know that if you want flexibility and intelligence, you must have authority." He then added: "I know very well that the stability pact is stupid, like all decisions that are rigid."

Although officials concede privately that the pact is having to evolve because of the slowdown, no one has gone so far in public. Mr Prodi's words were seized upon by the French as vindication for defying edicts to reduce spending. The finance minister, Francis Mer, said Mr Prodi now, "declares and recognises himself that the Stability and Growth Pact may need to show a bit more flexibility and a little less simplicity".

Only last week Mr Mer's failure to take action over the national budget left him isolated at an EU meeting. He also defied the Commission by refusing to go along with promises by the other 14 EU states to cut their underlying deficits by 0.5 per cent annually from and including next year.

Several diplomats were withering in their criticism of Mr Prodi, one describing his comments sarcastically as a "typically sagacious intervention". But some officials argue that the underlying sentiments are now shared in most of the important capitals of Europe and that the pact as it was originally conceived is dead.