The European Central Bank spooked financial markets on Thursday by dousing hopes of dramatic crisis-fighting action in the euro area hours before European leaders gathered for what the French president billed as a last chance summit. ECB President Mario Draghi discouraged expectations that the bank would massively step up buying of government bonds if European Union leaders, gathered in Brussels, agreed on moves towards closer fiscal union.
He said the eurozone's rescue fund should remain the main tool to fight bond market contagion, despite its clear limits, and it was illegal for the ECB or national central banks to lend money to the IMF to buy eurozone bonds, appearing to veto one fire-fighting option under consideration.
The ECB did take unprecedented action to support Europe's cash-starved banks with three-year liquidity and cut interest rates back to a record low 1.0 percent to counter a forecast recession brought on by widespread austerity measures.
The euro and world shares dived as investors, increasingly convinced that only the ECB has the power to protect the eurozone, focused on what Draghi was cool about rather than the measures he announced. "One step forward, two steps back," said Alan Clarke, UK and eurozone economist at Scotia Capital. "The eurozone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."
French President Nicolas Sarkozy dramatised the danger facing the 17-nation single currency area hours before their eighth crisis summit of the year in a speech to European conservative leaders in the French port city of Marseille. "Never has the risk of Europe exploding been so big," he told leaders including German Chancellor Angela Merkel and the heads of the EU institutions.
"The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence," the French leader said. "If there is no deal on Friday, there will be no second chance." France and Germany used the Marseille meeting to lobby for their plan to amend the European Union treaty to toughen budget discipline, which they want to have ready by March. But several countries are sceptical of full-blown treaty change.
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