New ‘Fiscal Discipline’ Treaty in Eurozone Crisis

Posted December 9th, 2011 at 7:10 pm (UTC-5)
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Most members of the European Union agreed Friday to a new deal that will increase central control over individual government budgets. The plan is an effort to address the debt problems that have threatened the common euro currency and driven Europe into an economic crisis.

All 17 EU members that use the euro agreed to the plan, promoted by Germany and France, after long negotiations at an EU summit in Brussels. Some non-eurozone countries also agreed, but Britain – the strongest of the 10 non-euro countries, said it was still opposed.

British Prime Minister David Cameron said that Britain will not be part of a new EU treaty.

“Britain's interests in the European Union – keeping markets open, free trade, selling our goods and services with rules over which we have a major say — all those things are protected, they don't change. But this new round of integration and special powers and surrenders of sovereignty for European countries and others that want to join the euro, they will be carried on outside the European Union treaty. So we will not be presenting this new treaty, when it's agreed, to our parliament. It will not involve Britain.

French President Nicolas Sarkozy was disappointed with that decision, but he said non-euro countries could join the deal after consulting their parliaments.

“We would have had, rather liked to have, a reform treaty with 27 countries. This was not possible given the position of our British friends, so this will be an intergovernmental treaty with 17 countries open to whoever wants to join, and already a lot of countries have let us know that they would like to join. At the moment I am talking to you, two countries clearly said that they will stay out, and it is Hungary and the United Kingdom.”

Stock markets and the value of the euro rose Friday after the deal was announced. But economists' opinions were split about whether the deal would do enough to prevent future fiscal crises and solve the current problems.

European Central Bank chief Mario Draghi called the deal “a very good outcome for the euro area.”

“It's a very good outcome for the euro area, very good. It's quite close to good fiscal compact and certainly it is going to be a basis for a much more disciplined economic policy for euro area members. ”

EU leaders hope the plan will calm months of volatility in financial markets by offering a long-term solution to the eurozone government debt crisis. Greece, Portugal and Ireland have already received international bailouts because of their overwhelming sovereign debt, and some analysts feared even greater needs from heavily indebted Spain and Italy.

German Chancellor Angela Merkel said Friday's deal would make the euro more secure by imposing sanctions on countries that do not limit government budget deficits.

“I believe after long talks there is a very important result because we learn from the past and the mistakes and we say in the future: binding agreements, binding rules, more influence for the European Commission, more unity and with that more coherence. That is our contribution to making the euro safe.”

The EU leaders also agreed to give the International Monetary Fund more money for programs designed to keep the current crisis from spreading. IMF chief Christine Lagarde praised the agreement reached Friday.

“What is really encouraging today is to see that the members that will be party to the agreement have decided three key components. Number one, they want to really consolidate their fiscal union, number two they've decided to accelerate the European stability mechanism and number three, they've decided to add to the resources of the International Monetary Fund by an amount of 270 billion dollars, that is to be confirmed within 10 days. So that's a really good step in the right direction.”

France and Germany – the two strongest economies in the eurozone — wanted to change the EU treaty and require more central budget oversight to avoid a repeat of the government debt crisis in Greece, Italy and other weaker members that threatened the currency union. The proposed changes also call for a unified corporate tax rate and a new financial transaction tax.

Any new treaty will have to obtain final ratification from member countries. EU officials said they expect it to be signed by March.

The 17 eurozone nations have stalled economies, with some analysts saying they have already dipped into a recession. The European Central Bank took a modest step ahead of the summit to trim its prime interest rate.