European Central Bank President Jean-Claude Trichet denied the euro is under speculative attack despite its steep fall, and called instead for a quantum leap in monitoring to ensure government budgets are kept under control.

Germany's Der Spiegel magazine quoted Trichet on Saturday as saying that Europe needed profound changes to prevent and punish misconduct by euro zone states in their economic policies.

Trichet said financial markets were in their worst situation since World War Two and possibly even since World War One. But he flatly denied that euro zone governments had forced the ECB into joining a $1 trillion effort this week to prevent Greece's debt crisis from spreading across the bloc and beyond.

In his interview, Trichet indicated that European governments rather than currency markets bore responsibility for the euro's slide, which took it to an 18 month low against the dollar on Friday.

It is not a question of an attack on the euro. It is to do with the public sector and hence to do with financial stability in the euro area, he said. It's clear that the chief responsibility of Europeans is to take appropriate measures to counteract the current tensions in Europe.

The euro slid as far as $1.2358 on electronic trading platform EBS on Friday, the lowest since October 2008 and down from around $1.50 late last year, when investors refocused their fears onto the toll that austerity measures to cut budget deficits might take on European economies.

Trichet has long urged euro zone governments to reduce their budget deficits and thereby prevent a steep rise in their debt. Failure of the Greek government in particular to take this advice led to a debt crisis that risked spreading to other euro zone countries with similar problems, and beyond.

A COMMON FATE

Trichet called for far better monitoring of government budgets. Under the Stability and Growth Pact these should run deficits of no more than three percent of gross domestic product (GDP), although some countries such as Greece have reached nearly four times that.

Asked whether Greece should leave the euro zone, he said: No, this is not an option. When a country enters monetary union, it shares a common fate with the other countries.

However, he added: What we need is a quantum leap in mutual surveillance of economic policies in Europe. We need improved mechanisms to prevent and punish misconduct.

We need an effective implementation of the mutual control, we need effective sanctions for breaches of the Stability and Growth Pact. The ECB calls here for profound changes.

The European Commission proposed new sanctions on Wednesday to enforce compliance with European Union budget rules and called for national budgets to be coordinated with Brussels before parliaments vote on them.

Trichet rejected a suggestion by Spiegel that the public had the impression that the ECB had been forced into action by euro zone governments this week, sending a fatal signal on its independence and credibility.

This is nonsense, he said. We take our decisions in complete independence and we have many times set ourselves against the heads of government.

On Monday the ECB began buying government bonds issued by some euro zone governments, reversing its long-standing resistance to such moves to prop up the debt market.

Referring to the state of financial markets since the collapse of Lehman Brothers investment bank, Trichet said: Without a doubt, since September 2008 we have been in the most difficult situation since the Second World War, perhaps since the First. We have experienced and are experiencing really dramatic times.

(Writing by David Stamp; Editing by Ruth Pitchford)

Germany European union European central bank