The currency with a hole in it

The drama of the European single currency has had more than its fair share of theatrical twists and turns. The prize for the most spectacular transformation in the long-running Folies Maastricht must, however, be awarded to the quaintly named Stability and Growth Pact. This character entered Act 1 as a strutting hero, but now – several years into the plot – has been unmasked as the villain of the piece, destined shortly to be skewered behind an arras and then hauled off into oblivion. The Pact’s demise may dampen the spirits of euro enthusiasts, but it creates a chance for Britain to obtain more influence on European policies while maintaining its position outside the euro.

The dumping of the Pact – designed to shore up the euro by setting limits on budget deficits and government borrowing – has been accomplished by no less a personage than Romano Prodi, the president of the European Commission, who last week said it was ‘stupid’. Mr Prodi, who as Italian prime minister in the late 1990s was largely responsible for Italy’s achievement of joining Economic and Monetary Union (EMU) in 1999, has a formidable reputation for emotional outbursts. As head of government he had a penchant for personally telephoning the Financial Times to complain about editorials berating Italy’s economic policies. Now he has surpassed himself. With one blow against the economic rules underpinning the European currency project, Mr Prodi has maddened the monetarists, fortified the fiscal faint-hearts, and deepened doubts among all those (particularly in Britain) who had wondered whether the euro could ever prosper.

On one level, Mr Prodi, with his plea for ‘intelligence’ in interpreting the fiscal limits, is simply calling for common sense. Ever since the Pact was forged in 1997, two years before the euro’s birth, many economists have argued that, during a time of slow economic growth such as that facing Europe today, rigid borrowing rules could risk turning downturn into depression.