Prodi remarks add to doubts on euro

THE EURO suffered a fresh bout of turbulence yesterday after Romano Prodi, the incoming European Commission president, was forced to clarify remarks that seemed to question Italy's long-term place in the single currency.

Mr Prodi, the former Italian premier, called on Rome to reduce inflation to the average eurozone level, warning it would be "difficult" for it to remain in the euro otherwise. But he later said he had been reported in a "very ambiguous, wrong way".

The euro fell sharply against sterling and the dollar before recovering ground.

In his clarification, Mr Prodi said there was no prospect of Italy having to relinquish its place in the euro, but added there could be long-term problems if it did not reduce inflation.

The euro has fallen by around 10 per cent since its launch on 1 January and was recently hit by worries over a decision to increase Italy's predicted deficit levels from 2 per cent to 2.4 per cent.

In a conference speech to Italy's chemical industry association, Mr Prodi was quoted as saying: "Italy had very low inflation in 1998, but above that of our European partners. If we continue to have costs which diverge from other European countries it will be more difficult to remain in the euro.

"If Italy continues to lose a percentage point of competitiveness per year, as is happening, and if the trend continues in the long term, it will be a tragedy for us. It could be difficult to remain within the euro."

Italy's average consumer price inflation in 1998 was 1.8 percent while that of the European Union was 1.0 percent.

Mr Prodi later said: "One per cent is a very small difference, but I feel I must warn that in the long run the difference must be zero, zero, zero".

The euro fell sharply against sterling, hitting 64.93p compared with Friday's close of 65.21p, before recovering to 65.01p.

Analysts said the confusion had dealt the credibility of the fledgling currency another blow.