EURO PLUNGES AS PRODI SAYS ITALY MAY QUIT By Toby Helm in Luxembourg and George Jones
THE euro was hit by another crisis of confidence yesterday when Romano Prodi, president-designate of the European Commission, questioned Italy's long-term ability to remain inside the single currency.
Mr Prodi was quoted by Italy's main news agency, Ansa, as saying: "We have had a very low inflation, only two per cent, but other European competitors have had one per cent. If our costs diverge and we continue on this road we will fail to remain in the euro. To lose one point a year in competitiveness over a period of time would be a tragedy."
Romano Prodi: 'misreported' and 'misinterpreted'The euro slumped by almost a cent after the reports of Mr Prodi's remarks. It closed in London at $1.0316, within a whisker of its all-time closing low of $1.0290 on June 7. It also closed lower against the pound at £0.6501, down from £0.6521 at the weekend.
In order to restore calm, Mr Prodi moved swiftly to insist that he had been "misreported" and "misinterpreted" - although he did not specifically deny having made the remarks. However, the incident raised questions about Mr Prodi's sureness of touch when talking publicly about sensitive economic and political issues.
The comments - reportedly made to a meeting of Italy's chemical industry association - were particularly surprising because there is no legal provision in the Maastricht Treaty for a country to leave the single currency. It was the first time a senior EU figure had raised such a possibility.
The decision to lock exchange rates and adopt the euro is described as "irrevoccable" in the Treaty. This is why William Hague once described it as "a burning building with no exits".
The Tories seized on the controversy as further evidence of the "strains and tensions" built into the single currency. Francis Maude, the Conservative Treasury spokesman, said it showed how difficult it was to run a "one size fits all" policy to suit all the countries who had joined the single currency. He claimed that British taxpayers could find themselves "picking up the tab" for Italy's debts if Britain joined the single currency.
Downing Street refused to comment on Mr Prodi's remarks, but they were another embarrassment for Tony Blair, who has been accused of backing away from his enthusiasm for the euro.
In his later comments, Mr Prodi insisted that he had been stressing the need for the Italian government to continue the fight against inflation. Italy's inflation rate was 1.8 per cent in 1998, compared with 1 per cent for the euro area as a whole. "I told them that there is a one per cent difference - a teeny difference in inflation," he said. "These statements were completely misunderstood and I underlined strongly that there is no problem in the short and medium-term period."
Worries about Italy's fitness for monetary union grew last month after Rome demanded a loosening of its spending targets for this year. The demand, to which EU finance ministers reluctantly bowed, caused falls in the euro's value over several days because financiers believed it signalled that the ministers were not sufficiently committed to budgetary discipline.
Mr Prodi was chosen by EU heads of government in March to succeed Jacques Santer as President of the European Commission after the Brussels EU executive was forced to resign following an independent report into mismanagement and fraud in Brussels. He was seen as a reformer and an astute politician who would avoid blunders.