By BRIAN BLACKSTONE

FRANKFURT—European Central Bank President Jean-Claude Trichet delivered an impassioned defense of Europe’s common currency as the market continued to cast doubt on the ability of Greece and other debt-ridden euro zone countries to get their deficits under control.

Mr. Trichet’s remarks came as worries spread through financial markets that Greece’s fiscal woes will extend to other countries including Portugal and Spain. The cost of insuring the sovereign debt of those countries against default soared Thursday, putting downward pressure on the euro. Leading stock indexes in those countries also tumbled.

By midday, the Dow Jones Industrial Average was off 200 points at 10070. The declines were even more severe in commodities, with March oil futures down 4.9% to $73.23 a barrel and gold for April delivery, the most actively traded contract, down $50, or 4.4% at $1,062 an ounce.

Throughout the day, investors fled currencies and markets that are seen as taking the biggest hit should debt troubles in Greece or elsewhere lead to a full-blown crisis. The euro was trading at $1.3739, sharply down from $1.3905 on Wednesday. The euro continued to fall against the dollar after Mr. Trichet’s remarks.

The ECB president, in an uncharacteristically feisty appearance that at the bank’s monthly news conference, emphasized that despite the fiscal woes in some member states, the average budget deficit for the euro zone as a whole, at 6% of gross domestic product, is well below the double-digit gaps in the US and Japan.

“It is not necessarily very well known the kind of solidity” that the euro zone has, Mr. Trichet said.

The problems in Greece and other euro-zone countries with high deficits have prompted some economists to question the long-term viability of Europe’s common currency. Mr. Trichet, who in the past has called similar speculation “absurd,” nonetheless sough to counter doubts about the euro by highlighting the advantages of membership.

Mr. Trichet also reiterated warnings to Greece and other high-deficit countries in Europe that they will get no leeway when it comes to meeting their ambitious deficit-reduction promises.

“We always have been inflexible in our support of the stability and growth pact,” said Mr. Trichet, referring to the agreement that regulates euro-zone membership.

The stability and growth pact requires euro-zone members to keep budget deficits below 3% of their gross domestic product. However, a number of the region’s once fast-growing economies in southern Europe and Ireland are running double-digit deficits as a share of GDP. The most troubled country in the eyes of investors and rating agencies, Greece, has pledged to bring its deficit of almost 13% of GDP to less than 3% by just 2012.

“I haven’t heard any other leaders be so strongly pro-European, calling on member states to stick to rules but more or less promoting the European idea,” said Carsten Brzeski, economist at ING Bank in Brussels.

In doing so, Mr. Trichet “strengthened the ECB’s position as the guardian of the euro and monetary union,” Mr. Brzeski said.

On Wednesday, the European Commission accepted Greece’s fiscal plans, but warned more spending cuts and tax hikes may be needed.

“We expect and are confident that the Greek government will take all the decisions that permit to meet this goal,” Mr. Trichet said. He called plans by Athens to freeze wages, increase energy taxes and reform its pension system “steps in the right direction.”

The ECB’s economic and inflation assessment was little changed from January, suggesting that interest rates will remain at current levels until the end of the year or even into 2011. The central bank left its key lending rate unchanged at 1%, as expected.

Inflation is expected to “remain moderate,” Mr. Trichet said, and though the economy should continue on a moderate recovery path this year, it “could be uneven” as the stimulus from inventory replenishing and government support wears off.

The euro zone exited recession in the third quarter, though it expanded by just 1.5%, at an annualized rate. It is expected to have grown again in the fourth quarter—GDP figures are released next week. But the pace of expansion will be quite modest, economists warn, as the region’s largest economy, Germany, appears to have stalled in the final three months of the year.

German manufacturing orders unexpectedly plunged 2.3% in December from November, the economics ministry said Thursday.

“There is no broad-based strengthening in demand to fuel the recovery” in both Germany and the euro zone, said Société Générale economist Olivier Gasnier, in a note to clients.

If you enjoyed this post then Subscribe to Savvy Investor via RSS