Rules on euro are stupid, says Prodi

THE euro took a dive after Romano Prodi condemned the rules propping up the single currency as 'stupid.' The European Commission president declared that the financial straitjacket Brussels uses to stop member states spending too much is far too 'rigid and inflexible'.

He was simply blurting out something that most senior eurocrats have known for years - that the clumsy 'stability pact' is forcing Europe into the economic doldrums.

But his bluntness sent a shiver through money dealers, who fear that the currency is now doomed to slide further in value. It closed yesterday at 62.57p - down from 63.23p the day before. Against the dollar it fell by almost a full cent, to a fraction over 97 cents. When first introduced, it stood at $1.17.

Anti-euro campaigners seized on Prodi's remark as proof that the euro project is fatally flawed. The director of the No Campaign, George Eustice, said: 'If even Prodi is saying it is stupid, it would be ridiculous for us to give up the pound.'

Commission spin doctors tried to play down Prodi's comments, insisting they do not indicate conflicting views on the pact within the Commission. But City dealers were alarmed because the rules are a cornerstone of the euro system. They require member states to keep their deficits within 3% of gross domestic product as they work towards balancing their books.

Faith in the pact has been under severe strain in recent months. Germany and France are on course to break the 3% limit next year, and the EU has had to give them more time.

At the same time, the Commission has started work on making the pact more flexible. Effectively, Prodi was simply admitting that the existing rules are in tatters, that new ones are needed, and that eurozone countries had better stick to them.

Gordon Brown has long argued that countries with low debt, such as the UK, should be able to borrow and spend more than the pact allows. The Chancellor looks like getting his wish.

But Prodi's comments, in the French newspaper Le Monde, could mean the euro faces a long uphill struggle to establish itself as a reliable currency. That will boost the arguments of sceptics that keeping the pound would be a better bet.

In his interview, he made it clear that he still regards the pact as vital in co-ordinating the economic policies of the eurozone nations. But his use of the word 'stupid' was seen as a worrying sign of uncertainty by analysts. 'I know very well that the stability pact is stupid, like all rigid decisions,' said Prodi. 'If we want to adjust these, unanimity is needed and it doesn't work. The stability pact is imperfect, it's true, because there is a need for a more intelligent tool and more flexibility.' But he flatly denied that any increase in flexibility could lead to a complete relaxation of the rules. 'The idea of having divergent economic policies is totally crazy,' he said.

Senior Tories said it all shows that the EU is not committed to financial probity and that joining the euro is too risky. Shadow Chancellor Michael Howard said: 'Any single currency needs a stability pact to prevent runaway borrowing from one country which could bring the currency into disrepute. If you run away from the pact at the first sign of trouble, it damages the currency's credibility.'

Prodi also warned that it will be 'cataclysmic' if the Irish reject EU enlargement for a second time in their referendum on Saturday. Moves to admit ten more nations would be wrecked. However, an MRBI/Irish Times poll put 42%of voters in favour of enlargement, and only 29% firmly against.