This week some smart people thought they knew what was going to happen in Europe.

FLOYD NORRIS

Notions on high and low finance.

European and American officials thought there was a deal that would be worked out to provide the needed funding by printing money. There would be concessions to German demands for fiscal purity, but it would accept the need for drastic action.

Here’s the plan that some thought was all but a sure thing:

The central banks would find a way to pump in zillions of euros in liquidity. There would be more government bond purchases by the European Central Bank, but the more important part was to involve the International Monetary Fund. There was talk of a convoluted deal whereby the I.M.F. would get funding from European central banks and then lend money to European countries. The I.M.F. always attaches strings to loans, so this would not be free money for governments that could therefore abandon fiscal restraint, but it would solve the immediate problem.

Then Mario Draghi, the head of the E.C.B., threw cold water on I.M.F. involvement at his news conference today. And he said he had not meant to signal more bond purchases by the E.C.B. when he spoke to the European Parliament last week.

As he talked, stock and government bond markets went into reverse. The euro lost ground against the dollar.

On Wednesday, 10-year Italian bonds traded to yield about 6 percent. A day later the figure is 6.5 percent. Spanish yields went from 5.4 percent to 5.8 percent.

Those yields are not back to the highs before Mr. Draghi started the positive talk, but they are heading in that direction.

In an editorial today, The Financial Times wrote:

Time and time again over the past 18 months, European leaders have pledged to do “whatever it takes” to preserve the single currency. Just as often their subsequent actions, or lack of them, have belied these fine words.

The failure to fill in the gap between rhetoric and reality has taken the eurozone, and the world, to a perilous place. Fear about the ability of states to service their debts has become self-reinforcing. Absent a radical shift in market psychology, the very core of the eurozone is at risk. The break-up of the single currency, once dismissed as unthinkable, is now openly spoken of as a possibility.

It looks like this week’s summit meeting is going to produce more of the same.

Article source: http://feeds.nytimes.com/click.phdo?i=4d0f3976e04f65d5365432fcfa7e420e