Help on the horizon

Mario Draghi, the new head of the European Central Bank (ECB), said Thursday that the bank was ready to take stronger action to help resolve Europe's debt crisis, if political leaders agree next week on tighter budget controls in the 17-nation eurozone.

"What I believe our economic and monetary union needs is a new fiscal compact - a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made," Draghi told the European Parliament in Brussels.

"A new fiscal compact is definitely the most important element to start restoring credibility. Other elements might follow, but the sequencing matters," he added.

Without giving details on the possible action the ECB might take, Draghi said the bank had scope to act within the EU treaty and the most important thing was to make sure frozen credit channels start to work again.

The ECB cannot lend directly to governments, including by buying their national bonds. It can only buy national bonds on the secondary market, lowering borrowing costs for governments - action the central bank has shied away from because it believes that would take the pressure off politicians to cut spending.

Aligning budgetary policies

Two years into Europe's debt crisis, the ECB is under political and market pressure to step up purchases of eurozone government bonds or to lend money to the International Monetary Fund (IMF) to support ailing Italy and Spain.

Investors are fleeing the eurozone bond market, European banks are dumping government debt and a recession looms, fuelling doubts about the survival of the single currency.

EU leaders hold a key summit on December 9, with a focus on how to make the eurozone more unified. Germany is expected to press for an agreement on a treaty change to establish a means to veto national budgets in the eurozone that breach agreed rules.

French President Nicolas Sarkozy is due to speak on closer eurozone integration in an address in the Mediterranean port city of Toulon on Thursday evening. German Chancellor Angela Merkel will present her views to parliament in Berlin on Friday.

Author: Dagmar Breitenbach (Reuters, AP)
Editor: Martin Kuebler