Leaders of 17 euro nations, six other EU countries tentatively agree to new treaty that enforces stricter budget rules following all-night talks; treaty includes strict oversight of national budgets
December 9, 2011
– The leaders of the 17 countries that use the euro, plus six others, have tentatively agreed to a new treaty that enforces stricter budget rules seen as crucial to solving Europe's debt crisis and holding the currency-bloc together.
The effort by Germany and France to persuade all 27 European Union countries to agree to treaty changes failed, in large part because of Britain's refusal to give up some powers.
Following marathon all-night talks, the 23 decided to back a new treaty with strict oversight over national budgets, as they try to convince markets that the euro has a future. An agreement on fiscal discpline is considered a critical first step before the European Central Bank, the International Monetary Fund and others would commit more financial aid to help countries like Italy and Spain, which have large debts and unsustainable borrowing costs.
ECB President Mario Draghi praised the tentative deal as a good result for the eurozone.
The immediate market response was lukewarm, with stock markets in Europe fairly steady — the Stoxx 50 of leading European shares was trading 0.1 percent lower while the euro was down 0.1 percent at $1.3336.
Markets may be worried that the failure of the EU to get unanimous support for more stringent budgetary rules may rattle the foundations of a union created to foster peace and prosperity across Europe following World War II.
Even after Friday's long-awaited deal, watched by governments and markets worldwide, the European leaders have huge hurdles still ahead. They are meeting again later Friday to work out what exactly their new treaty will contain and how violators of its strict budget rules will be policed. They want it written by March.
Britain, which doesn't use the euro, led the push against a revised treaty tying all 27 EU countries to tighter fiscal union. The others that didn't sign on were Hungary, the Czech Republic and Sweden.
Britain's leaders argued that the revised treaty would threaten its national sovereignty and London's esteemed financial services industry.
Most EU countries had pushed for an EU-wide accord to avoid a split, but Germany and France, the eurozone's biggest economies, quickly made clear that a deal among the 17 euro countries and whoever else wanted to join was better than nothing.
French President Nicolas Sarkozy laid the blame at the feet of British Prime Minister David Cameron.
"David Cameron made a proposal that seemed to us unacceptable, a protocol to the treaty that would have exonerated the United Kingdom from a great number of financial service regulations," Sarkozy said shortly before dawn, after what he called a "difficult" dinner meeting had dragged through the night.
Cameron defended his stance.
"What was on offer is not in Britain's interest so I didn't agree to it," he told reporters in Brussels.
"We're not in the euro and I'm glad we're not in the euro," he said. "We're never going to join the euro and we're never going to give up this kind of sovereignty that these countries are having to give up."
The French president said work was proceeding on an "intergovernmental accord" among the 23 countries involved in the emerging fiscal pact.
Swedish Prime Minister Fredrik Reinfeldt said it was unlikely his country would join the accord.
The governments signing onto the new treaty will have to agree to allow unprecedented intervention in national budgets by EU-wide bodies.
According to a statement issued after the meeting broke up, governments participating in the agreement will need to have balanced budgets — which is counted as a structural deficit no greater than 0.5 percent of gross domestic product — and will have to amend their constitutions to include such a requirement.
The treaty will include an unspecified "automatic correction mechanism" for countries that break the rules, the statement said.
In addition, countries that run deficits larger than 3 percent will face sanctions.
To prevent such deficits, countries will have to submit their national budgets to the European Commission, which will have the authority to request that they be revised. Countries will also have to report in advance how much they plan to borrow.
"It is not over, yet, but the eurozone is on a good way towards a fiscal compact and hopefully saving the euro," Carsten Brzeski, European economist at ING, said.
Many issues need to be ironed out though and Cameron has threatened to complicate the new 23-member treaty.
"The institutions of the European Union belong to the European Union, belong to the 27" member states, he said. The new treaty would rely on the European Commission and the European Court of Justice to enforce its rules.
Despite the challenges ahead, German Chancellor Angela Merkel praised the deal.
"I have always said the 17 states of the eurogroup have to regain credibility," she said. "And I believe with today's decisions this can and will be achieved."
Germany and France insist that the best way of regaining market trust is to beef up the financial governance overseeing the eurozone countries and their budgets. Any intergovernmental treaty will be an effort to ensure that national budgets are brought into balance and large debts are not run up again.
But many other countries, and economists, argue that to regain the trust of investors in the short-term the eurozone needs to have enough money on hand to guarantee that countries won't default on their debts.
Toward that end, Herman Van Rompuy, president of the European Council, said the eurozone, together with some other EU countries, would provide up to euro200 billion ($268 billion) in extra resources to the International Monetary Fund, to be used to help countries in dire straits. Non-euro countries Sweden and Denmark already said they would contribute some extra money.
On Thursday, the ECB's Draghi kept financial markets guessing about whether the bank is willing to take aggressive action to bail out heavily indebted euro countries. He said the bank had no explicit plan to do so, although some analysts said they believed this to be a bargaining position ahead of the EU summit.
There was no immediate agreement on boosting the eurozone's own bailout funds, meant to rescue countries having trouble refinancing their debts. In their statement, the currency union's leaders put it off until March to decide whether their rescue funds need to be able to provide more than euro500 billion in help to struggling countries.
Sarkozy said the EU's two bailout funds — the European Financial Stability Facility, or EFSF, and the European Stability Mechanism, or ESM — would be managed by the European Central Bank, though the details still need to be worked out.
The failure to get agreement among all 27 EU members came despite a marathon negotiating session. The 27 EU presidents and prime ministers began their talks at 7:30 Thursday evening and continued past 4:30 a.m.
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