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Europe debt crisis: EU moves too little, too late?

Greece's new leader today submitted a draft budget while Italy has presented an austerity program. But investors are skittish as EU debate rages over how best to address the Europe debt crisis.

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Should the European Central Bank intervene?

Spain’s Prime Minister José Luis Rodríguez Zapatero launched a dramatic appeal to his eurozone partners. “We need a European Central Bank that does justice to its name and defends the common currency,” he said on Thursday, suggesting that the ECB should on a large scale buy bonds of countries under pressure. This appeal was mainly directed at German Chancellor Angela Merkel.

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Germany is strictly opposed to the ECB intervening on behalf of struggling economies. Wolfgang Franz, who heads the German government’s council of economic advisers, calls it “a deadly sin.”

“There’s a deeply engrained fear of inflation in the German collective consciousness,” says Mr. Carl-Ludwig Holtfrerich, an economic historian at Berlin’s Free University. “Germans living in the first half of the twentieth century saw their savings wiped out twice when the central bank started the printing press. The memory is still alive.”

Germany proposes strict measures

Chancellor Merkel has made it clear that she wants the European Treaties to be changed. Those members of the eurozone who don’t stick to the rules and overspend should be taken to the European Court of Justice, she demands.

Germany is also supporting the idea of levying a tax on financial trading, an idea very much opposed by the US and especially Britain – the latter worried about preserving London's status as an international hub of finance.

It is doubtful though that Germany is going to use all these bargaining chips, says Mr. Dullien. “If the choice is survival of the euro or the ECB turning into the lender of last resort, Germany is not going to walk away from the euro. And chances are, this decision has to be made soon.”

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