Luxembourg's finance minister weighs in behind embattled Prodi

Luxembourg's finance minister, Mr Jean-Claude Juncker, yesterday became the first EU finance minister to publicly echo European Commission Mr Romano Prodi's criticism of EU budget rules, saying they needed to be applied more flexibly.

Mr Juncker, who is also Luxembourg's prime minister, told Austria's Der Standard newspaper that there was no need to make a fetish of the EU's Stability and Growth Pact on budget discipline as growth sputtered.

He also said it might be worth tolerating temporary breaches of the pact's deficit cap.

These views are a far cry from the more orthodox defence of the pact mounted by most other European policymakers, including Belgian finance minister Mr Didier Reynders yesterday, and would have been considered heresy as recently as a week ago.

But Mr Prodi's comment that the pact's rules were "stupid" have opened the gates to radical suggestions of how to overhaul the pact, and nothing appears sacred - not even the pact's deficit ceiling which Mr Prodi himself has said should be respected.

"It makes little sense to force the four deficit states [Germany, France, Italy, Portugal\] to cut or delay spending on public investment in a way that would slow economic recovery just to guarantee a kind of fetishistic fulfilment of the pact," Mr Juncker said.

"The truth lies between the two poles, that of upholding the idea of stability and of managing in line with economic conditions."

This line was reiterated by European Commission spokesman Mr Jonathan Faull who said the Stability Pact had served the EU well but that it was now time to try to improve the system.

"We have had now some considerable experience of implementation of the Stability and Growth Pact. With that experience, the time has come now to lift our eyes... from the daily grind and consider the steps that need to be taken to improve the mechanisms," he added.

Europe's current economic conditions are not good and nor are its prospects.

Firms are becoming gloomier about the economic outlook, according to a survey by EU business group UNICE, while Germany's six leading economic institutes slashed their growth forecasts for Europe's biggest economy for this year and next.

As tax revenues fall and welfare spending rises, deficits in Germany, France and Italy - the euro zone's largest economies - are rising towards the EU limit of 3 per cent of gross domestic product, if they are not already over it. Against this backdrop, Mr Juncker suggested nothing was sacred.

"We have to ask ourselves if it could not be permitted for a country to exceed the 3 per cent [deficit\] limit if it was agreed in advance. If this was done with everybody's agreement, it would be acceptable for a very short time."

He sought to pre-empt criticism by saying this would not get Berlin off the hook given it did not have prior approval to exceed EU deficit limits. This may not prevent a backlash in early November, when EU finance ministers are scheduled to meet.

Finnish finance minister Mr Sauli Niinisto was scathing about Mr Prodi in a radio interview: "The only things that on these occasions I think have been stupid have been his statements." Also, Belgium's Mr Reynders said the stability pact was already flexible enough.

"I am always very concerned about a Commission initiative which consists in intervening without a real debate with the member-states in the appropriate institutions, i.e. the Eurogroup, Ecofin or European Council," he added. - (Reuters)