EC's Prodi fends off criticism of 'stupid' remark

The European Commission president reiterates his call for flexibility whenapplying the rules of the stability pact

The European Commission president, Mr Romano Prodi, has fended off criticism of his description of the Stability and Growth Pact as "stupid", citing the danger of deflation in support of his call for a flexible application of the euro-zone's budget rules.

Addressing the European Parliament in Strasbourg, Mr Prodi stressed that he supported the rules but warned that applying them too rigidly could damage Europe's economy.

"This downturn is so marked that a good part of the global economy could be at risk of the kind of deflation that we thought we had put behind us. Should we have tried to force countries with big deficits to stick to budgetary targets regardless of changes in the economy?

"Taking that approach could have jeopardised the economic prospects of not only the countries concerned but also the whole of Europe," he said.

The Economic Affairs Commissioner, Mr Pedro Solbes, sounded a strikingly different note, defending the pact and arguing that the Commission was showing adequate flexibility in its application.

"I believe that the pact provides the member-states with rigorous, as well as flexible, rules to meet the short-, medium- and long-term policy challenges the Union is facing.

"The Commission has reiterated during the last four years that sticking to the close-to-balance rule is the best way for fiscal policy to fully play its stabilising role over the cycle," he said.

Germany, France and Italy are close to breaching the pact's 3 per cent ceiling on budget deficits and Portugal is believed to have breached the limit already. Portugal's president, Mr Jorge Sampaio, yesterday became the first senior EU politician to call for the pact's rules to be changed.

"Several European states are already facing economic difficulty as a result of an inadequate model for budget stability, which was conceived during a time and for a time of economic expansion. I wonder if the time has come to envisage the possibility of a new pact," he wrote in the French newspaper Le Monde.

Mr Prodi said that the difficulties faced by Portugal and others underlined the need for the Commission to be given more authority to enforce budget rules.

"We need an authority that has the power to give guidance to the system in a way that is both rigorous and intelligent, and bearing the complexity of our economies in mind," he said.

In a separate move, the European Central Bank (ECB) said yesterday that it planned to reform voting rights in its governing council.

Under the Nice Treaty, the ECB must change the way its governing council works, as the council will become too large to be efficient if and when it expands from its 18 members at present.

Currently, central bankers from each euro zone member-state can vote in the governing council, along with the ECB's six-person executive.

The ECB welcomed the Irish referendum result but added it would delay its plan until the process of EU ratification of the treaty was officially completed.

"The ECB confirms that it will present a proposal as soon as possible after all ratifications have been effected," an ECB spokesman said.