European Central Bank Chief Calls for Eurozone ‘Fiscal Compact’

Posted December 1st, 2011 at 12:20 pm (UTC-5)
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The new chief of the European Central Bank says it might give new assistance to the continent’s debt-ridden governments, but only if the 17-nation eurozone first adopts “a new fiscal compact” to control the spending of individual countries.

Bank President Mario Draghi said Thursday that more centralized oversight of budgets was “the most important element” for the eurozone nations to adopt before the bank would consider increasing its current limited purchases of government debt..

The two-year European debt crisis has threatened the survival of the 12-year-old European monetary union, with some analysts suggesting that the demise of the euro would send the world economy into a recessionary tailspin. The eurozone economy is struggling, with one new report showing that manufacturing fell to a 28-month low in November.

The long reach of the debt crisis touched Greece and Spain on Thursday, and French President Nicolas Sarkozy scheduled a major speech outlining his vision for new budget controls over individual countries.

Greek unions took to the streets in Athens in a 24-hour protest of the austerity policies supported by the caretaker government of new Prime Minister Lucas Papademos. Spain raised more than $5 billion in new funding, but it had to pay its highest interest rate in at least six years.

Mr. Sarkozy, who faces a tough re-election contest next April, was faced with attempting to lay out a plan to satisfy financial markets worried about possible defaults on government bonds, yet at the same time not cede too much budget control to the European Commission, a move that could reduce French sovereignty.

Stock markets in Asia soared Thursday, continuing a global rally after the world’s major central banks took coordinated steps Wednesday to support Europe’s troubled economy. European and U.S. markets traded in a narrow range after recording huge gains on the central banks’ cut in the cost of borrowing U.S. dollars.

Shares in Japan’s Nikkei average closed up nearly two percent, while Hong Kong’s Hang Sang Index surged more than 5.5 percent.

Analysts said the move Wednesday by six central banks making it cheaper for financial institutions to borrow U.S. dollars gives Europe more time to find a solution to its economic crisis. European leaders are set for a summit late next week to discuss their options for resolving the debt crisis.