Herman Van Rompuy, president of the European Union, has blamed the strength of the euro in recent years for blinding the eurozone to its underlying fiscal problems.
He also criticized financial markets for overreacting to those economic difficulties and being too heavily influenced by “rumors and prejudices”.
He said: “The markets were too indulgent in the first decade, but now they overreact a lot of the time to small incidents.
“What went wrong wasn’t what happened this year. What went wrong was what happened in the first 11 years of the euro’s history. In some ways we were victims of our success.
“The euro became a strong currency with very small interest rate spreads [on government bonds]. It was like some kind of sleeping pill, some kind of drug. We weren’t aware of the underlying problems.”
In an interview with the Financial Times, Mr Van Rompuy said that the 16-nation bloc had been on the edge of a breakdown last month that could have caused a world crisis. But European leaders now understood that the way forward was to implement politically unpopular but necessary economic reforms, such as opening up labor markets and raising the retirement age, he said.
He is to chair a summit of EU heads of state and government in Brussels on Thursday that will approve a 10-year program for economic reform.
He acknowledged that the markets had played a useful role since the Greek debt crisis erupted last October in identifying weaknesses in eurozone economic governance.
But he fully supported tougher financial market regulation, especially for credit rating agencies and derivatives markets – measures EU authorities are drawing up.
“Most of us are not happy with excessive market developments. But when you look at this in a broader perspective, the markets are sanctioning bad policies, sometimes excessively, disproportionately and based on rumors and prejudices.”
Asked if he thought markets acted like “packs of wolves” – a term used last month by Anders Org, Sweden’s finance minister – he replied: “It is not in my character to use such words.”
Mr Van Rompuy said financial markets had contributed to the crisis by being too soft on fiscally irresponsible governments in the years after the euro’s creation in 1999.
He criticized the French and German governments of the early part of the decade for relaxing the stability and growth pact – the ECU's fiscal rulebook – in 2005. “This sent the wrong signal,” he said.
Mr Van Rompuy, 62, said Europe’s biggest challenge was to introduce reforms required to double the ECU's economic growth rate and safeguard its unique blend of vigorous capitalism and a generous welfare state. “The toughest thing now is reforms in the budgetary field and the economy – competitiveness, labor market reforms, the retirement age,” he said.
“Of course, it will be difficult. At certain times there will be social unrest and political opposition to all this. But I know most of the leaders now. They are preparing to take huge risks because they know what is at stake for the eurozone.”