Germany and France will push for a broad treaty "refounding and rethinking the organization of Europe," French President Nicolas Sarkozy declared Thursday. He said that without some new "convergence" among European countries, the continent's crushing debt could destroy the euro.
Sarkozy made the statements in the southern French port city of Toulon as he and German Chancellor Angela Merkel prepare to meet in Paris on Monday to try to lift Europe out of the debt crisis ahead of a major EU summit next week. Earlier Thursday, the head of the European Central Bank hinted that the ECB now may be willing to take bolder actions to address the crisis that has rocked the continent.
"There can be no common currency without economic convergence, without which the euro will be too strong for some, too weak for others, and the eurozone will break up," the French president said before several thousand sympathizers of his conservative party.
On Friday, Merkel will address Germany's parliament about Europe's financial crisis and the EU summit on Dec. 9, which is expected to focus on how to make the eurozone more unified.
Merkel has acknowledged the need for treaty changes that impose stricter financial controls on eurozone countries to prevent them from taking on too much debt.
German Finance Minister Wolfgang Schaeuble told reporters in Berlin on Thursday there is now "a crisis of confidence" in the eurozone and that tough and credible new rules are needed to regain market confidence. Germany has said EU treaty amendments are required to do that.
Sarkozy spoke a day after the European Central Bank, the Federal Reserve and the central banks of Canada, Japan and Switzerland moved together to make it easier for commercial banks to borrow American dollars. It was a move intended to calm financial markets, which had grown increasingly worried about European debt.
Seventeen countries share the euro, and those countries plus 10 more make up the European Union. All 27 would have to approve a change in the Maastricht Treaty, which created the euro in 1999. Sarkozy said the treaty "has revealed itself to be imperfect."
A disorderly breakup of the euro would devastate the world economy, analysts predict. It could cause banks to grow fearful and stop lending money to each other, which could trigger a replay of the stock market crash during the last world financial crisis, in 2008.
In addition, reduced economic output in Europe would hammer the economies of the U.S. and China, both of which depend heavily on Europeans to buy the things they make and export.
More than ever before, the ECB seems willing to consider bolder action to address the continent's financial crisis.
A month ago, at his first news conference as ECB President, Mario Draghi said it was "pointless" for European governments to expect the bank to rescue them through massive bond purchases. That had been the same stance as his predecessor, Jean-Claude Trichet. But on Thursday, Draghi hinted that such expectations might not be futile after all.
Draghi opened the door to further ECB intervention ever so slightly in a speech to the European Parliament. He said the bank is prepared to play a bigger, yet limited role in the resolution of Europe's debt crisis — but only after the eurozone countries tether their economies more tightly.
Speculation is mounting that EU leaders will align their spending policies more closely to bring government debt levels under control in the future. This must happen, Draghi said Thursday, before the ECB or other institutions could take more aggressive steps to help prevent the continent's current debt overload from ripping apart the euro and the global financial system.
"Other elements might follow, but the sequencing matters," he said. "And it is first and foremost important to get a commonly shared fiscal compact right."
Draghi gave the speech after delivering the bank's 2010 annual report to the European Parliament, a body of elected representatives to which the ECB is accountable.
Analysts' decoding Draghi's message — which was delivered in typically vague central bank speak — sensed an opening they hadn't heard before.
"Draghi seems to suggest that if a fiscal compact does get approval and looks credible, then the ECB can shift gears and become more interventionist," said Neil MacKinnon, global macro strategist at VTB Capital.
Laura Veldkamp, an economics professor at New York University, said: "I would say this is a big change. Traditionally, the ECB has seen its only objective as maintaining a stable, low rate of inflation. The very idea that he's (considering) doing something to stabilize bond markets ... is a big change."
Still, Draghi's comments were laced with enough caveats to temper the euphoria that swept across financial markets Wednesday, when the ECB, the Federal Reserve and four other central banks took decisive action to make it cheaper for commercial banks to borrow dollars.
The ECB cannot lend directly to governments, including by buying their national bonds. It can, however, buy national bonds on the secondary market, lowering borrowing costs for governments. The ECB has committed just over euro200 billion ($268 billion) to such purchases, but it has resisted going further because it believes that would take the pressure off politicians to cut spending.
Draghi said such interventions "can only be limited" and said it is up to governments to first put their finances in order to convince bond markets that they are creditworthy borrowers.
"Governments must — individually and collectively — restore their credibility vis-a-vis financial markets," said Draghi, who only replaced Jean-Claude Trichet as ECB head a month ago.
Three relatively-small countries — Greece, Ireland and Portugal — had to be bailed out because of unsustainable debt levels, and Italy, the eurozone's third-largest economy, is facing intense strains as its borrowing costs surge. The big worry in the markets now is that Italy, with its debt mountain of euro1.9 trillion ($2.55 trillion) is just too big to bail out under current rules.
Analysts say the eurozone has little choice but to back proposals for much closer coordination of their spending and budget policies.
Since the euro was established in 1999, the rules governing the eurozone have been fairly lax. A commitment for countries to keep their budget deficits in check was violated on numerous occasions, including by Germany, Europe's biggest economy.
Draghi said the joint intervention by the six major central banks was only a temporary measure. Still, the move was wildly cheered in the markets on Wednesday, with the Dow Jones industrial average rising nearly 500 points.
On Thursday, the Stoxx 50 index of leading European shares closed 0.5 percent lower though there were encouraging signals in the bond markets, where the borrowing rates of France, Italy and Spain all fell amid hopes of an imminent resolution.
France and Spain survived a test of investor sentiment Thursday, selling all the bonds they offered at rates lower than feared.
Still, the eurozone economy shows all the signs of returning to recession.
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