Eurozone rescue leaves the UK cold

2011-12-10 14:20

Europe split on Friday in a historic rift over building a fiscal union to preserve the euro, with a large majority of countries led by Germany and France agreeing to move ahead with a separate treaty, leaving Britain isolated.

Twenty-three of the 27 leaders agreed to pursue tighter integration with stricter budget rules for the single currency area, but Britain said it could not accept proposed amendments to the European Union (EU) treaty after failing to secure concessions for itself.

After 10 hours of talks, all 17 members of the eurozone, and the six nations that aspire to join, resolved to negotiate a new agreement alongside the EU treaty with a tougher deficit and debt regime to insulate the eurozone against the debt crisis.

“Not Europe, Brits (are) divided. And they are outside of decision-making. Europe is united,” Lithuanian President Dalia Grybauskaite said in blunt English on arriving for the second day of the bloc’s eighth crisis summit this year.

European Central Bank (ECB) president Mario Draghi called the decision a step forward if the 17-nation eurozone is to emerge stronger from two years of market turmoil.

“It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members,” Draghi said. “We came to conclusions that will have to be fleshed out further in the coming days.”

German Chancellor Angela Merkel said she was satisfied with the decisions.

She said: “The world would see that Europe had learned from its mistakes and avoided a “lousy compromise.”

Merkel, Europe’s most powerful leader, said she had not given up hope that Britain would eventually agree to change the EU treaty to anchor stricter budget discipline.

Active ECB support will be vital in the coming days.

Irish Europe Minister Lucinda Creighton said Dublin and many other member states expect the central bank to take a more proactive approach to the debt crisis in the weeks ahead. Traders said the ECB bought Italian bonds on Friday to steady markets.

The euro, commodities and shares fell in Asia because of growing doubts about whether Europe could forge a financial firewall to arrest contagion in bond markets, but the currency regained ground in Europe and European stocks were narrowly higher.

Francois Perol, chief executive of France’s second-largest bank, BPCE, said: “Markets need to know where we are going, how we’re getting there, and they need

to know how long it’s going to take. Where we are going, I believe, is toward a more unified and serious Europe in budgetary terms.”

Asked if the euro was safe now, Polish Prime Minister Donald Tusk said: “I’m not sure.”

In the run-up to the summit, Draghi’s use of the term “fiscal compact” had spurred hopes that the ECB would be prepared to engage in massive buying of bonds from distressed eurozone states, an interpretation he discouraged on Thursday.

Merkel and French President Nicolas Sarkozy had wanted to get the entire EU to agree to change the Lisbon (Portugal) treaty so that stricter budget and debt rules for eurozone states could be enshrined in basic law. But Britain, which is outside the eurozone, refused to back the move, saying it wanted guarantees in a protocol protecting its financial services industry. Sarkozy described British Prime Minister David Cameron’s demand as unacceptable.

Cameron hinted that London may try to prevent others from using the executive European Commission and the European Court of Justice, saying: “Clearly the institutions of the European Union belong to the European Union, they belong to the 27 (eurozone members).”

As a result, Merkel and Sarkozy said the intention was to forge an inter-governmental treaty among the eurozone nations and any others that wanted to join. They indicated that could be up to 25 nations in all, with only Britain and perhaps Hungary left out for now. Sweden and the Czech Republic said they would consult their parliaments.

“This is a summit that will go down in history,” said Sarkozy. “We would have preferred a reform of the treaties among 27. That wasn’t possible given the position of our British friends.

“And so it will be through an inter-governmental treaty of 17, but open to others.”

Herman van Rompuy, president of the European Council and chairperson of the summit, focused on the success ion securing agreement for tighter fiscal limits, including the need for nations to bring budgets close to balance.

He said: “It means reinforcing our rules on excessive deficit procedures by making them more automatic.

“It also means that member states would have to submit their draft budgetary plans to the (European) commission.”

On treaty change, Van Rompuy said the new treaty would involve the eurozone and at least six other nations, with two more waiting for a mandate to participate.

But it could still take months of wrangling, with nations like Finland and Slovakia opposing a Franco-German drive to take decisions on future bailouts by a super majority to avoid being taken hostage by a single small country.

In a meeting billed as a last chance to save the euro, with financial markets unconvinced by policymakers’ efforts to tackle the region’s problems so far, the leaders also took several decisions on the bailout fund, the European Stability Mechanism (ESM), which will come into force in July.

The ESM’s capacity will be capped at €500 billion (about R5.4 trillion), less than it had been suggested was possible before the summit. The facility will not get a banking licence, as Van Rompuy originally had proposed, due to German opposition.

It also was agreed that the EU nations would provide up to €200 billion in bilateral loans to the International Monetary Fund (IMF) to help it tackle the crisis, with €150 billion of the total coming from the eurozone nations.

IMF managing director Christine Lagarde said as she left the summit: “We can be very pleased at the result.”

Earlier, the plight of Europe’s banks was thrown into sharp relief. The European Banking Authority told them to increase their capital by a total of €114.7 billion, significantly more than predicted two months ago.

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