BRUSSELS ? European Central Bank chief Mario Draghi hinted the bank was ready to play a bigger role in the resolution of Europe's debt crisis, but only after the 17 countries that use the euro tether their economies more tightly.
Speculation is mounting that EU leaders will align their budgetary policies more closely in order to bring government debt levels under control in the future. This must happen, Draghi told the European Parliament 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," Draghi said. "And it is first and foremost important to get a commonly shared fiscal compact right.
"Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term," he added. "After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds."
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. But it has resisted such action because it believes that would take the pressure off politicians to cut spending.
Draghi said such interventions "can only be limited" and said it was 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.
A summit of EU leaders on Dec. 9 is expected to focus on how to make the eurozone more unified. The markets think that 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.
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.
Draghi said Wednesday's joint intervention by the world's leading central banks to make dollars more easily available is only a temporary measure. 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 fell 0.4 percent in morning trading 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, as they managed to sell all the bonds they were planning at rates lower than feared.
Wednesday's coordinated action by central banks will ease borrowing for banks, but it does little to solve the underlying problem of mountains of government debt in Europe, leaving markets still waiting for a permanent fix.
Potentially, the ECB has unlimited financial firepower through its ability to print money. However, Germany finds the idea of monetizing debts unappealing, warning that it lets the more profligate countries off the hook for their bad practices. In addition, it conjures up bad memories of hyperinflation in Germany in the 1920s.
One option that appears to be surfacing is that the ECB could provide the Washington D.C.-based IMF with more resources so it can then lend it out to countries that need financial help. Reports earlier this week suggested that the IMF was gearing up to lend Italy, the eurozone's third-largest economy, with euro600 billion in loans.
"Draghi didn't rule out the ECB providing funds to the IMF to provide to Italy but he's equally making it very clear that the ultimate solution lies with the governments," said Simon Derrick, a senior analyst at the Bank of New York Mellon.
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Pylas contributed from London.
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