Europe's prophet of doom

The sense of impending European doom was heightened overnight, after former IMF boss, Dominique Strauss-Kahn, launched a stinging attack on European leaders for failing to contain the raging debt crisis, warning that they had only weeks to come up with real solutions.

In his first return to public life since his abrupt resignation as IMF boss in May, DSK (as he is known in the French media) told a conference in Beijing that the eurozone was like a raft "on the verge of sinking.”

European leaders, he said, had failed to understand the severity of the crisis, and had repeatedly made the mistake of trying to cut debt, rather than boost economic growth.

"With the recent storm, the raft no longer appears resistant enough,” he warned, referring to the eurozone. "The fact that the euro is still in the middle of the river, and that a fiscal union hasn't been achieved makes it very vulnerable, and the raft seems to be on the verge of sinking.”

He added that he was not persuaded that German Chancellor Angela Merkel and French President Nicolas Sarkozy understood each other well, "which is probably one of the reasons why the European system is having trouble moving forward.”

DSK was scathing about the stability pact that was agreed at the latest Brussels summit of European leaders. While it may be good news for German domestic politics, he said, it was "bad news for the European population.”

He also pointed out that the region's defences were weak. He noted the region's new €500 billion ($US650 billion) bailout fund would only start operating in several months' time. But, he said, it "is a question of weeks. The question is not a question of months.” And he doubted whether the IMF would be able to raise an extra $200 billion in funding, given the United States did not want to boost its contribution.

In contrast to his outspoken comments on the eurozone, DSK declined to answer questions on his own turbulent year. Seven months ago, DSK resigned as IMF boss after being charged with the attempted rape of a hotel chamber maid in New York. The charges were later dropped.

Meanwhile, investors were disheartened after the European Central Bank boss, Mario Draghi, told a committee of the European Parliament in Brussels that a European Union treaty prohibited the ECB from "monetary financing”, or printing money to lend to troubled eurozone countries.

"We want to act within the limits of that treaty,” he said, adding that if the ECB were to violate the rules, "that would affect the credibility of our institution.”

In recent months, the ECB has come under intense pressure to become the lender of last resort for debt-laden eurozone countries, by buying massive quantities of their bond. So far the ECB has spent more than €200 billion buying Greek, Portuguese, Irish Italian and Spanish bonds. But Draghi again repeated his earlier pledge that ECB buying was neither "eternal nor infinite.”

Instead, Draghi emphasised the ECB's role in lending eurozone banks as much as they needed at low interest rates, so that they could continue to lend. "We're doing all we can to prevent a shortage of credit, which would affect lending to businesses and households.”

In an interview with the Financial Times published overnight, Draghi warned of the heavy costs of a eurozone break-up. He said that debt-laden countries that left would face the problem of high inflation, and would still have to implement structural reforms "but in a much weaker position.” What's more, their exit would cause problems for remaining members, because it would break European law and "you never know how it ends really.”

When European parliamentarians quizzed him about his comments, Draghi assured them that he held "no doubt as to the strength of the euro, its permanence, and its irreversibility.”

He said that many people outside the eurozone wasted a lot time speculating about its collapse, and working out catastrophic scenarios. In this context, he said, "a clear analysis of such a scenario was necessary.”