European Leaders Agree on Treaty Changes; UK, Sweden Hold Out

Arjun Dave
09 Dec, 2011
New York City

European leaders agreed to a fiscal pact that will limit government spending and budget deficits to targets that are set and monitored by a central authority in the region with the enforcement powers. UK opposed the treaty changes but the euro zone nations and six other members agreed.

[R]4:25 PM Frankfurt – European leaders agreed to an intergovernmental pact that will limit government spending and budget deficits to targets that are set and monitored by a central authority in the region with the enforcement powers. UK opposed the treaty changes but the euro zone nations and six other members agreed to fiscal integration compact.[/R]

European leaders hammered out an agreement that brought disparate nations together to solve the debt crisis that threatened the existence of the euro.

The summit in Brussels, though short on specific details showed a rare spirit among leaders as the crisis escalated in the last six months.

European leaders agreed to a master plan proposed by Germany and France to increase fiscal integration among members and impose penalties and sanctions on countries that fail to live up to fiscal and financial measures demanded by the European Union.

The measures were agreed by the euro zone member nations but Britain, Hungary and Czech Republic did not agree to codify the intergovernmental pact.

Sweden and Czech Republic wants to consult their parties and their parliaments before agreeing to sign the treaty and Hungary said it wants to study the details.

Six other European Union members – Bulgaria, Denmark, Lativa, Lithuania, Poland and Romania – said they will join the newly agreed fiscal compact.

UK Prime Minister David Cameron said Britain is unlikely to sign the intergovernmental pact because “What was on offer is not in Britain’s interest so I didn’t agree to it.”

UK economy is dominated by financial services industry and relies on foreigners living in London that enjoy tax free status to their foreign income. The status is widely condemned by France and Germany and the banks in UK also oppose to the financial transaction tax.

At the heart of the agreement, member nations agreed to limit structural budget deficit to 0.5% of gross domestic product over a full economic cycle. Nations exceeding this limit will face penalties and sanction and intervention from a central authority in the European Commission. The EC will be able to demand and revised budgets to meet the targets set in the treaty.

German Chancellor Angela Merkel expressed her satisfaction and said in the early hours after the meeting, “I have always said the 17 states of the euro zone to have to regain credibility and I believe with today’s decisions this can and will be achieved.”

Investors focused on the reaction of the European Central Bank President Mario Draghi and wondered when the bank will step up its plan to buy sovereign bonds.

Draghi commented after the agreement in Brussels today, It is a very good outcome for the euro area. It’s going to be the basis for much more disciplined economic policy for the euro zone and certainly it is going to be helpful in the present situation.”

Leaders also agreed to contribute more funds to the International Monetary Fund that will be routed back for emergency lending to nations. The move is still opposed by Draghi and violates the spirit of the European Union treaty.

Herman Van Rompuy, president of the European Council said leaders agreed to provide €200 billion in additional resources to the IMF for emergency lending to the European nations.

The euro zone and non-euro zone member nations Sweden and Denmark agreed to additional funding for the IMF.

However, the summit of the leaders postponed till March to increase the size of its bailout fund of €440 billion that most economists believe needs to be leveraged to €1 trillion.