ECB president Draghi hints at further action

Mario Draghi, president of the European Central Bank, said that fiscal union is essential to the eurozone, though he was vague on the details.

NEW YORK (CNNMoney) -- The head of the European Central Bank offered hints Thursday about the No. 1 question in Europe: Will the bank step up and do more to calm the bond markets?

The ECB is under pressure to start buying up massive amounts of government debt, but has so far not jumped into the fray with full force.

Mario Draghi, the newly anointed ECB president, said in a speech in Brussels that a new "fiscal compact" is essential to reforming the eurozone and achieving economic stability.

The ECB president went further, suggesting that the bank might take more aggressive action in the near future.

"Other elements might follow, but the sequencing matters," he said. "And it is first and foremost important to get a commonly shared fiscal compact right."

Draghi, the former central Italian banker who became ECB president last month, also referred to recent measures taken by authorities from Europe, the United States and other countries to address the European debt crisis.

On Wednesday, the Federal Reserve, along with the European Central Bank and the central banks of England, Switzerland, Japan and Canada, acted together to make it cheaper for banks around the world to borrow U.S. dollars

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Also, on Monday, European Council president Herman Van Rompuy announced that European leaders were working on a new plan to ensure fiscal discipline across the euro area and would present a "roadmap" of this plan on Dec. 9.

Draghi said that "notable progress has been achieved in reinforcing economic governance" in 2010 and 2011. But he added, "I recognize that this may not be evident in times of crisis."

The eurozone bond market is one of the clearest signs that the 17 member states of the eurozone are fiscally fractured, despite the fact that they use a common currency.

As an example of the disparity, German 10-year bond yields were trading at 2.2% on Thursday. That's compared to Italian bonds, which were trading at 6.8%, having repeatedly exceeded the 7% benchmark that's associated with bailouts, since that's the level that Ireland, Greece and Portugal exceeded before getting bailed out by their eurozone neighbors.

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"Dysfunctional government bond markets in several euro area countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends also on the conditions of the bond markets in the various countries," said Draghi.

In other words, the disparity among eurozone bond yields demonstrates that the fiscal policies and economies of the different eurozone countries bare little resemblance to each other, despite their common currency.

This is in spite of the fact that the ECB has been buying bonds in order to prop up the sovereign debt of weaker nations. This is cause for concern, since many economists see the ECB as the only institution with enough power to make a difference, but the bond-buying efforts have demonstrated its limitations

In a recent interview, Tommy Molloy, chief dealer at FX Solutions in Saddle River, N.J., said the disparity in bond yields is "more similar to what we were like 20 years ago before the euro project was started. All of the convergence of yields that happened in anticipation of the euro is pretty much thrown out the window."

Draghi would like to change that.

"It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union," he said.