Skip to main content

European officials are scrambling to restore shattered investor confidence, setting the stage for radical changes in the currency union and a more aggressive mandate for the European Central Bank, both of which are regarded as essential if the euro is to survive the continuing debt crisis.

The ECB is ready to take stronger action if euro-zone leaders are ready to impose tougher fiscal discipline across the 17-nation region, the bank's new president, Mario Draghi, told the European Parliament Thursday.

"A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations," Mr. Draghi said.

Story continues below advertisement

French President Nicolas Sarkozy provided that signal in a speech in Toulon and German Chancellor Angela Merkel is expected to follow suit in an address to German parliamentarians Friday. The euro zone's most powerful politicians will meet in Paris on Monday to plot strategy for a crucial euro-zone summit meeting next Friday.

Faced with a debt crisis that has spread into their own core countries, the two leaders are pushing hard for a complete revamping of rules that would impose tighter fiscal discipline, enforce debt reduction targets and close gaps in competitiveness, productivity and living standards that have divided the region into camps of haves and have-nots.

"There can't be a single currency without economies heading toward more convergence," Mr. Sarkozy said. If existing gaps widen further, "the euro will, sooner rather than later, be too strong for some and too weak for others, and the euro zone will explode."

Such major changes would require treaty changes that could not be implemented quickly.

"We are skeptical even a bold action plan … would draw a line under the crisis," John Higgins, senior markets economist with Capital Economics in London, said in a note.

The treaty revisions "and the introduction of common euro-zone bonds would probably not take place rapidly enough to prevent the crisis from escalating. And such measures would not, of course, address the fundamental economic and fiscal problems faced by many countries."

But the mere fact they are in the works might be enough to calm rattled markets, if a more aggressive ECB also intervenes in the debt market, other analysts said.

Story continues below advertisement

"At that meeting, the markets are going to look for some direction," said Alex Jurshevski, managing partner with Recovery Partners, who has advised several governments on debt restructuring. But he noted that earlier promises have not been translated into action of the sort that would calm investors. And he doubts that even genuine fiscal union would be enough to save the euro, unless the weaker insolvent countries – Greece, Portugal and Ireland – are cut loose.

But Mr. Sarkozy declared that debt writedowns in the euro zone must stop with Greece. "It must be made clear that a debt of a euro member will be repaid," he said, calling it "a question of confidence."

In his parliamentary appearance, Mr. Draghi did not explain what actions the ECB could take. But critics have been urging policy makers to give the central bank broad authority to intervene more heavily, with the capacity to buy unlimited quantities of government bonds in both the primary and secondary markets. Such enhanced firepower could stop speculative attacks on weaker governments and put a cap on bond rates.

The public comments follow Wednesday's co-ordinated action by six central banks, including the Bank of Canada, to ease a dangerous cash crunch in global markets. This has stemmed from the inability of European banks to obtain short-term financing through normal channels, as investors shunned euros, out of fear the currency may not survive.

Bank of England Governor Mervyn King took credit for organizing the meetings that developed the plan to reduce borrowing charges for U.S. dollar loans to the banks.

"It was the result of conversations which I initiated as chairman of what used to be known as the G10 governors, now the economic consultative committee, among a limited number of central banks," he told a news conference in London.

Story continues below advertisement

Several officials said there was no specific trigger for the action, with some denying it was a move taken because a European bank was on the brink of collapse. They characterized it as the culmination of weeks of worry as financial strains had built.

With a report from Reuters

Report an error Licensing Options
About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.