Two decades on, Waigel and Prodi still differ on euro pact

By Andreas Rinke and Gavin Jones

BERLIN/ROME (Reuters) - One is the German conservative who insisted the euro be based on tough budget rules; the other, a founding father of Italy's centre-left who famously attacked those rules as "stupid".

With the European Union embarking on major reform of its Stability and Growth Pact of fiscal governance, Reuters conducted interviews with Theo Waigel and Romano Prodi, both crucial players in the 1999 birth of the euro.

As European Commission chief in the early 2000s, it was Prodi's job to police the national deficit and debt rules which former German Finance Minister Waigel had been instrumental in designing a few years earlier.

But coming from opposite ends of the mainstream European political spectrum, they were never likely to see completely eye-to-eye on those rules and how they should be enforced. Two decades later, the two elder statesmen still don't.

These are their historical perspectives on how the Pact has worked - and how it should be changed.

HAVE THE RULES WORKED?

Waigel: "All members have profited from monetary union, including the weaker countries ... The Stability Pact was the answer to the fact that sustainability is not only necessary in climate and environmental policy, but also in fiscal policy. It is not a question of a country fulfilling the criteria for a year or two. It must be permanently the case to avoid friction."

Prodi: "It's hard to say. It was a defective instrument because it didn't have any economic foundation, which is why I called it stupid ... It was useful as a warning (for countries not to overspend) but it was clear that it became a problem when exceptions needed to be made. Then it couldn't be applied."

SHOULD IT BE REFORMED – AND IF SO HOW?

Prodi: "It's called the stability and growth pact, so in future it mustn't only put the accent on stability but also on growth ... I would suggest three things: increase the flexibility; give special treatment for investments that increase productivity; and also give special treatment to the investments needed to reach our climate goals."

Waigel: "It would be a mistake to relax the rules now. This would also be my warning for the new (German) Federal Government. The Stability Pact has sufficient flexibility, it does not need to be relaxed ... In fact, because of the huge demographic changes taking place, we need surpluses in our national budgets."

SHOULD BUDGET LEEWAY BE GRANTED FOR CLIMATE CHANGE?

Prodi: "Reaching net zero by 2050 is an ambitious target that will need huge investments to modernise our industries. This should be taken into account under the new rules."

Waigel: "Germany has refrained from the demand to exclude the costs of its (1990) reunification – even though it has spent 4 to 5 percent of its economic output annually on it. If we can cope with such a challenge, other countries will have to deal with the rules as well."

(Edited by Mark John and Toby Chopra)