EU Leaders Sign Historic Pact To Bolster Fiscal Unity, Prevent Future Debt Crises

European leaders agreed on what is being referred to as an historic treaty Monday night. All EU countries except Britain and the Czech Republic agreed to sign the new fiscal compact treaty which was developed in order to stop Eurozone governments from running up excessive debts in the future.

The hope is that such an agreement will put a stop to the credit contagion that has been sweeping Europe by signaling that overspending will no longer be tolerated.

The AP reports that the new treaty was agreed upon at a summit of European leaders in Brussels on Monday. It includes strict “debt brakes” and makes it more difficult for countries running excessive deficits to escape sanctions. The 17 countries in the Eurozone hope the tighter rules will restore confidence in their joint currency and convince investors that all of them will get their debts under control.

There were no major surprises at the summit, as 25 of 27 EU members signed up to a German-inspired pact for stricter fiscal discipline that will empower the ECJ to impose fines (which will be capped at 0.1% of GDP) on Eurozone countries running excessive deficits – as measured by their debt-to-GDP ratios.

Britain had said in December it wouldn't sign the new treaty due to potential damaging effects on its financial services industry. It is reported that the Czech Republic didn't sign because of parliamentary procedural problems.

According to the deal, Governments will be required to keep their budget deficits at an average of 0.5% of GDP over the economic cycle and reduce their total government debt to 60% of GDP.

The leaders also agreed to speed up the introduction of the permanent bailout mechanism by bringing the ESM into effect in July of this year. However, we note that European leaders will not publicly discuss the possibility of raising the €500 billion ceiling on the bailout fund until the next scheduled summit on 1-March.

Although there were smiles for the cameras after the meeting, it should be pointed out that Monday's summit did not produce any meaningful breakthroughs regarding the next bailout package for Greece, including whether official creditors (such as the ECB) should take part in efforts to reduce the country's debt burden.

Another topic that was to receive top billing at the summit was growing the Eurozone economies.

Although there was very little actual progress made, leaders at the summit promised to create plans to stimulate growth and create jobs across the region.

"Yes we need discipline, but we also need growth," said Jose Manuel Barroso, the president of the European Commission, the EU's executive arm.

The next summit is scheduled for March 1, 2012.

Introducing the Short-Term Market Manager
This new service is designed to help investors navigate the stock market's short-term trends (5-15 days). Check it out today!

 

Remember, you are in control your email alerts! You can receive alerts for more than 25 free research report alerts including: The “10.0” Report, The Insiders Report, ETF Leaders Report, and The Focus List.