At the end of July, 2012, in response to a re-intensification of the European sovereign debt crisis, Mario Draghi, the President of the European Central Bank (ECB), indicated that the ECB would do "whatever it takes" to save the euro. This announcement, together with the ECB's subsequent policy elaboration on September 6, 2012 has succeeded in calming financial markets over the past two months and in substantially reducing yields on Spanish and Italian bonds. 

There are a number of reasons to question whether the ECB's bold policy action will in and of itself have succeeded in putting an end to a crisis that has plagued Europe now for more than two years or whether it will prove to be yet another stopgap measure like the ECB's Long-Term Refinancing Operation (LTRO) at the end of last year. Among the reasons for thinking that the European debt crisis is far from resolved are the following:

• The ECB action does nothing to alleviate the severe fiscal austerity policies that are being imposed on the European periphery and that are driving those countries into deep economic recessions.
• The announced ECB policies have done nothing to address a very difficult economic and political situation in Greece that could very well see that country exiting the Euro within the next three to six months.
• Mr. Draghi has been at pains to emphasize that the support being offered by the ECB to purchase Italian and Spanish bonds on a massive scale is strictly conditional upon those countries negotiating externally monitored fiscal adjustment programs. It is far from clear whether political conditions in Italy and Spain will allow for the early negotiation of such programs without renewed market pressure on those countries.
• The ECB's policy initiative has met with considerable opposition from the German Bundesbank and the German public. It is not clear how far the ECB can go in its policy of unlimited bond purchases in the face of mounting opposition from the German Bundesbank and from a German public which is increasingly sympathetic to the Bundesbank's point of view.

The remainder of this briefing elaborates on the aforementioned points and concludes that the European debt crisis is far from resolved. It considers that in a best case scenario there will be a significant deepening in the European economic recession in 2013 that could have negative consequences for the global economic outlook. In a less benign scenario, one could see the exit of more than one country from the Euro during the course of 2013 that could have serious global economic repercussions.

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