ECB's key role in front line before summit to save euro
The vital role of the European Central Bank was in the front line of the eurozone debt crisis on Thursday as new ratings warnings for the entire EU ramped up the stakes of a crucial summit in Brussels.
The ECB's governing council, under intense pressure to rescue the euro, gathered in Frankfurt just hours before European Union leaders met for what is widely seen as the last chance to prevent the eurozone from breaking up.
A collapse of the single currency would threaten the EU itself and send violent shock waves reverberating through the global economy.
The ECB is widely expected to cut its key interest rate at its meeting in view of a looming economic downturn, and markets were nervously waiting to see what other action the central bank -- which many see as the only body able to contain the crisis -- would take to shore up the euro.
For the markets, the crucial question was whether the ECB will see view commitments by Germany and France to tighten up eurozone budget discipline as sufficiently convincing to give it extra room for manoeuvre.
But investors appeared sceptical whether Europe Union leaders could really come up with convincing commitments.
"The entire world is watching. We must do everything" to save the euro, European Commission chief Jose Manuel Barroso told reporters in the French port city of Marseille.
"It is extremely important that we all together, all the EU, show that the euro is irreversible."
European stocks were mixed and the euro fell against the dollar.
The announcement by international credit rating agency Standard & Poor's that it is placing entire 27-nation bloc on downgrade watch, just days after similar moves for eurozone countries and their EFSF bailout fund, has turned up the pressure to breaking point.
"The situation is serious... the euro can explode and Europe unravel", France's minister for European affairs Jean Leonetti told French Canal Plus television.
S&P's chief economist for Europe Jean-Michel Six insisted the agency was not working on the basis of an outlook that the single currency area will break up.
The ECB has played fire-fighter to a substantial extent throughout the long and debilitating crisis. But its officials, including its new chief Mario Draghi, insist that such a role is only temporary and it is ultimately up to governments to get their finances in order.
There is widespread pressure for the ECB to turn back the crisis by simply printing enough money to buy up a large part of the mountain of debt that many eurozone countries have amassed.
But the bank, strongly backed by Germany, is vehemently opposed to this, which it argues runs against the very rules that the eurozone, and the wider EU, is built on.
Among the so-called "unconventional" measures" the ECB has taken so far to contain the crisis, the central bank has been keeping the region's banks flush with liquidity or cash.
It has also, albeit reluctantly, been buying up the sovereign bonds of countries finding it difficult to drum up financing the usual way via the markets.
Crucially, in comments to the European Parliament last week, ECB chief Draghi signalled flexibility to go beyond those measures, but only if governments credibly removed the threat of moral hazard for non-compliant countries.
Analysts were sceptical, however, whether the ECB would deliver so shortly before the EU summit.
The summit itself looks set to be the toughest yet, with Germany playing down hopes that it will save the euro and French President Nicolas Sarkozy warning the risk of a eurozone "explosion" was still very real.
For high-ranking officials and diplomats, the two biggest obstacles are Germany's refusal to embark on anything short of treaty changes, while Britain is refusing to back Berlin's proposed changes unless it secures important concessions for its financial services.
Eurogroup chief Jean-Claude Juncker was flatly opposed to such demands.
And Swedish Prime Minister Fredrik Reinfeldt said treaty changes were not the sort of solution the markets were looking for.
The situation is veering from serious towards desperate, so much so that US President Barack Obama held urgent telephone talks late on Wednesday with German Chancellor Angela Merkel.
Already, Obama had despatched his treasury secretary Timothy Geithner to Europe for talks with key players that will continue on Thursday in Marseille, France, where EU conservative allies are meeting for pre-summit negotiating strategy talks.
The US has a "very strong interest" in a successful summit outcome, Geithner said during a visit to Italy.
© 2011 AFP