"What I believe our economic and monetary union needs is a new fiscal compact - a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made," he told the European Parliament.

"We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short-term. Our answer is that it is definitely the most important element to start restoring credibility.

"Other elements might follow, but the sequencing matters." Mr Draghi did not spell out what action the ECB might take, but it is under huge political and market pressure to massively step up purchases of euro zone government bonds or to lend money to the IMF to support ailing Italy and Spain.

He added that the ECB had scope to act within the European Union treaty and the most important thing was to make sure that frozen credit channels start to work again.

Mr Draghi, who faces some of the toughest decisions in the currency's 12-year history after just one month in the job, said the ECB was aware many European banks were in difficulty because of stress on sovereign bonds, tight inter-bank funding markets and scarce collateral.

"Downside risks to the economic outlook have increased," he said, noting that the ECB's mandate was to maintain price stability "in both directions" - a rare indication that the bank is concerned about deflation risks as well as inflation.

Eoin Treacy's view We have mentioned on a number of occasions that the ECB could be expected to highlight the fact that its price stability mandate works in both directions. The downside pressure on growth experienced by many European economies suggests wage inflation is unlikely to be a concern. Higher taxes and lower spending are also contributing to a decreased velocity of money reading.

The ECB is playing a fine balancing act. It cannot simply agree to an unlimited bond purchase program without a sounder fiscal union upon which to base its money supply expansion. The European Council meeting on December 9th is another in a series of summits where markets have high expectations of a concerted approach to tackling the Eurozone's many issues. Greater fiscal unity is really the only solution to the Eurozone's problems. The question remains how many countries will acquiesce to this requirement. I suspect most will do what they can to remain as part of the Euro for the simple reason that the alternative is a far worse solution.