Italy told lire cannot ever pull out of euro

CONFIRMING THE suspicions of Eurosceptics that life inside the single currency could be like being stuck in a burning house with no fire escape, Brussels insisted yesterday that Italy cannot legally pull out of the euro.

A day after the incoming European Commission President, Romano Prodi, sent the euro into a nose dive with comments which appeared to suggest the contrary, the Commission said there was a legal obligation on the lire to stay inside the euro.

Despite a hasty clarification, Mr Prodi's intervention on Monday raised questions over the long-term ability of the lire to stay in the euro zone, given the Italian economy's inflation record.

But Patrick Child, spokes-man for the acting European monetary affairs commissioner Yves-Thibault de Silguy, said the EU treaty was "clear on the irreversible character of participation in monetary union".

With markets jittery over the strength of the fledgling currency, the episode highlighted the difficulties in preventing damage to the euro from politicians' off-the-cuff statements.

It also raised questions about Mr Prodi's media savvy, and his ability to cut his ties with Italian politics. As one EU diplomat put it yesterday: "Prodi needs to decide whether he wants to be an Italian politician or the President of the Commission."

The original intervention came in a speech from Bologna in which 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."

He added: "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." His corrected statement came swiftly, arguing there was no danger of the lire leaving the euro but not denying the risks of inflation rates diverging over the long term.

The euro, which has fallen by around 10 per cent since its 1 January launch fell sharply against sterling to 64.93p compared with 65.21p previously after Prodi's comments.