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October 19, 2002

An Italian Official's Blunt Words Set Off Euro-Mayhem


PARIS, Oct. 18 — With one word — "stupid" — the European Union's top official has blasted a hole into the already damaged budget and lending structure crucial for a unified European economy.

Romano Prodi, a former prime minister of Italy, did not seem to be the type of leader who would stir up controversy when he took over the post of president of the European Commission three years ago. After all, as a professor-turned-politician, he was once nicknamed Mortadella, after the sausage made in Bologna, his home town.

But central bankers, finance ministers and Mr. Prodi's euro-colleagues — grappling with struggling economies — reacted with varied levels of shock, rage, disbelief and delight after he told Le Monde in an interview published on Thursday, "I know very well that the stability pact is stupid, like all decisions that are rigid." There is a need, he added, "for a more intelligent tool."

The 1997 Stability and Growth Pact, as it is called, is the fragile if grand framework for the European single currency. It requires each of the 12 governments that have adopted the euro to hold its deficit to less than 3 percent of gross national product each year and to balance its budget by 2004.

But Portugal violated the deficit ceiling last July. Early this month, France refused to cut its projected 2003 shortfall, incurring the wrath of other finance ministers in the "euro zone." This week Germany — the country that most insisted on limiting deficits when agreements were being negotiated — confessed that it too has broken the deficit ceiling.

The reason is simple enough: European economies are floundering, with growth rates close to zero in most major countries. Tax revenues are down, spending is up and governments throughout the Continent are finding it more and more difficult to balance their budgets. Pressure to revive economies through more spending is growing, and what is already being spent on unemployment and welfare benefits has risen with more people out of work.

Mr. Prodi has made a number of verbal gaffes in his three years in office, but this one was by far the most serious, for his office is meant to enforce the pact. Following his terse description of it, the euro fell against the dollar. His remarks could seriously erode confidence in the European Union's most far-reaching achievement in the last decade, the single currency.

The euro-violators, unsurprisingly, were relieved. One is Francis Mer, France's finance minister, who has likened the zone's members to a family of "big people, small people, fat people, thin people," who must compromise to get along. After Mr. Prodi's remark, Mr. Mer noted with apparent satisfaction, "The president of the Commission himself declares that the Stability and Growth Pact may need to show a bit more flexibility and a little more simplicity."

On the other end of the spectrum are euro-enforcers like Greece's finance minister, Nikos Christodoulakis, chairman of the monthly meetings of the zone's 12 finance ministers. After Mr. Prodi's remark, he called the pact "a very essential tool for fiscal stability," and likened it to Christianity, in which "we have the Orthodox, we have the Catholics, we have the Protestants — but we believe in the same God."

Even within the commission itself there was consternation, and Monetary Affairs Commissioner Pedro Solbes, who has tried to defend the tough rules, told reporters in Barcelona today that the pact was already flexible enough and that he disagreed with his boss.

Edmund Stoiber, the center-right German politician who was narrowly defeated in last month's election for chancellor by Gerhard Schrφder, even called for Mr. Prodi's resignation. "What Mr. Prodi said yesterday clearly disqualifies him as president of the European Union," Mr. Stoiber told German ZDF television. "He's wasted any remaining trust in the European Commission in Europe."

In Frankfurt, the business daily Handelsblatt said: "Prodi is known for putting his foot in it, but whether his description of the E.U. budget rules as `stupid' was intentional or just another clumsy `faux pas' is not important. Credibility is vital to the pact, but following these unspeakable remarks, that credibility is more damaged than ever before."

Other Europeans hoped that Mr. Prodi had misspoken. "I hope that Prodi's comments were misunderstood," Klaus Liebscher, governor of Austria's central bank, told reporters in Vienna.

Not at all, Mr. Prodi said on Friday. "The president does not regret one word of his interview with Le Monde, which is very clear," Jonathan Faull, a spokesman, told a news briefing.

He added that Mr. Prodi would turn down an invitation from members of the European Parliament to explain his position. Later in the day, though, it was announced that he would indeed appear.

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