European Central Bank (ECB) president Jean-Claude Trichet, speaking at the EU Parliament, stated that the sovereign debt crisis has now become “systemic” and can only be addressed through political assertiveness and unity.
Mr Trichet said that, because of the interconnectedness of Western financial institutions, contagion was a serious danger, and claimed that, although the epicentre of risk for sovereign insolvency lies in Europe, the crisis could easily reach the US and Japan, countries that have an enormous stock of government-issued debt.
The ECB president said that, since the start of the crisis, he had warned the EU governments about the seriousness of the problem, and that it would not be solved unless Europe’s leaders and finance ministers came up with a clear and decisive plan to raise enough capital, solve banks’ potential insolvencies, and avert the much-feared double-dip recession.
To many commentators, it seemed that EU governments did not give enough importance to Mr Trichet’s warning. The summit of the European heads of state, which was supposed to take place on 17 October, has been put forward by a week, making markets increasingly anxious.
The justification lay in the complexity of recent events, which require leaders to gather more information on recent developments surrounding the Greek debt problem and the extent to which EU institutions should strengthen the European Financial Stability Mechanism (EFSF), the vehicle designed to bail out those European governments that face speculative pressure.
In the meantime, investors and EU policymakers hold their breath, waiting for the result of the Slovak vote on the strengthening of the EFSF, which has already been approved by Holland, Germany and Malta. The parliaments of these nations have approved the EFSF strengthening without any serious complications.
The Slovak vote, however, worries investors more, since it is not clear whether the current centre-right government has the majority to give its consent.
Additionally, the ratification of the EFSF strengthening may be more important than ever if Greece is allowed to default on its debt.
This seems more likely than ever after Jean-Claude Juncker, president of the committee of EU finance ministers, Eurogroup, claimed that the proportion of Greek debt being written down may reach up to 60% of the total value of assets owed by the country.
Nonetheless, French president Nicolas Sarkozy and German chancellor Angela Merkel, who form what many define as the Franco-German axis of EU decision-making, have reassured international institutions that, by the end of October, Paris and Berlin will have put into practice a coherent policy to save the euro.