EU Leaders Agree To Fiscal Compact; Next Step Left To ECB

With only 23 of the 27 EU members agreeing to the concept of a new treaty proposing tighter fiscal integration, Europe’s leaders turned their attention to creating a “fiscal compact” amongst the 17 countries that utilize the Euro.

The UK vetoed the proposed new EY treaty while Sweden, Hungary, and the Czech Republic said they needed to consult their parliaments before signing on to the new treaty.

Although some analysts have expressed disappointment that the full roster of EU countries did not support a new treaty, reports indicate that EU leaders have agreed in principle to the new “fiscal compact” which would implement tighter budget integration and create debt rules for the Eurozone.

As has been demanded by Germany, the fiscal compact accord would include automatic sanctions on budget rule-breakers unless three quarters of the member states agree to block the sanctions.

Speaking at a press conference following the meeting in Brussels, French President Sarkozy said the 17 Eurozone countries would sign an intergovernmental accord (aka the “fiscal compact”) aimed at stabilizing the currency in the face of the debt crisis. Sarkozy said that any other EU members that wanted to join were welcome.

The key benefit seen by analysts to pursuing an intergovernmental accord is that such an agreement can be approved and ratified much quicker than a full-fledged treaty change.

Britain, which does not use the Euro currency, refused to back the proposed new EU treaty. British PM Cameron said his country wanted guarantees in a protocol protecting its financial services industry. Sarkozy described British Prime Minister David Cameron's demand as unacceptable.

Herman Van Rompuy, the president of the European Council and the chairman of the summit, focused on the success in securing agreement for tighter fiscal limits, including the need for countries to bring budgets close to balance.

Van Rompuy said, "An inter-governmental treaty can be approved and ratified much more rapidly than a full-fledged treaty change, and I think speed is also very important to enhance credibility."

The expected date for the new treaty to be written is March 2012.

Under the new agreement, Eurozone countries would have new rules to govern their budget deficits and be punished if they breach them.

With the “fiscal compact” agreed to in principle, the next step in fighting the crisis appears to be left to the ECB.

On Thursday, ECB President Mario Draghi backed away from the idea of a quid pro quo exchanging ECB bond buying for a fiscal compact. Some analysts believe Draghi’s comments yesterday were political in nature and designed to put the pressure on EU leaders to get the job done. However, it remains to be seen whether Draghi will now have the ECB step up to play a more meaningful role in the crisis.

Draghi praised the agreement on a fiscal compact as “a very good outcome.”

 

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