Prodi Backs Eurozone Deficit Rule

Earlier in the week European Commission President Romano Prodi came under fire for referring to the EU’s Stability and Growth Pact as "stupid." In an interview with the French newspaper Le Monde on Thursday, Prodi admitted that the Pact, which has come under pressure from countries such as France, Germany and Italy, who want to loosen the strict application of its rules, was "stupid and inflexible, like all rigid decisions."

On Sunday, the president reiterated his earlier statements, saying on the French radio station Europe 1, "I would repeat that interview word for word." At the same time, he also said he supported the three-percent budget deficit rule, a key component of the Stability Pact. Prodi now faces an intense session in the European Parliament on Monday, when supporters of EU fiscal discipline grill him on the exact meaning of his controversial words.

Flexibility or discipline?

The Stability and Growth Pact, which was established to maintain budgetary guidelines and protect the euro from devaluation, was agreed to by all 12 members of the eurozone -- those EU member states with the common currency. The Pact sets a three percent budget deficit ceiling for all members. Any country exceeding this limit faces financial penalties. Germany and Portugal already run the risk of having to pay hefty fines for surpassing the three-percent boundary.

Critics of the Stability Pact say the rigid adherence to rules forces governments to raise taxes or cut spending at exactly the wrong moment in the economic cycle – during a downturn – when fiscal policy needs to be looser to stimulate growth.

Supporters of the Pact, namely those smaller economies such as the Netherlands, say that the guidelines protect the euro from being devaluated as a result of uncontrolled deficits. Advocates of fiscal discipline say that Prodi’s comments undermine the rules the Commission is struggling to maintain against resistance from the three biggest economies in the eurozone, Germany, France and Italy.

"Calling (the rules) into question, is very dangerous because it could undermine confidence in the euro," European Central Bank council member Ernst Welteke told Germany’s paper, Bild am Sonntag.

Hans-Georg Poettering of the center-right European People’s Party went a step further on Saturday, accusing Prodi of a breach of trust by publicly attacking a fundamental pillar of EU law. "I fear your use of the term ‘stupid’ to describe the Stability Pact was a grave error as it causes great damage to our currency and undermines economic and political confidence in it," Poettering wrote in an official letter lambasting the president.

Prodi defends himself

But Prodi insisted on Sunday that he still supported the three-percent deficit limit, he was just in favor of more power to interpret the rules flexibly. "I said very clearly that the three percent is a rule, the Stability Pact is our rule," the president said on Europe 1 radio.

At the same time, the beleaguered president said the eurozone needed more freedom to apply the Stability Pact’s rules according to changing economic conditions: "It is not possible to live only with fixed rules, given the complexity of the economy. We have to have an authority to interpret all the difficulties and variations of the economy."

Economic policy needs to be flexible, but that does not mean so free that the rules are no longer respected, Prodi explained: "Flexibility means intelligence and application of the rules, in a concrete case with an authority capable of doing it." Prodi, however added that neither the Commission nor himself had the power to change the rules. "I’ve said clearly that I have the power to emphasize (the rules), to point them out, to invite (others to follow them), but not to decide – I have to be honest," he stated in the radio interview.

When asked if his authority as Commission president had been weakened by his remarks about the Stability Pact, Prodi denied this saying, "Authority is always affirmed in struggle and debate. That’s the rule of democracy."