Following marathon all-night talks, the 23 decided to back a new treaty with strict oversight over national budgets, as they try to convince markets that the euro has a future in the wake of a crippling debt crisis.
Even after Friday’s long-awaited deal, watched by governments and markets worldwide, the European leaders have huge hurdles still ahead. They are meeting again later Friday to work out what exactly their new treaty will contain and how violators of its strict budget rules will be policed. They want it written by March.
Britain, which doesn’t use the euro, led the push against a treaty tying all 27 EU countries to tighter fiscal union, arguing that it would threaten its national sovereignty and London’s esteemed financial services industry.
Most EU countries had pushed for an EU-wide accord to avoid a split, but Germany and France, the eurozone’s biggest economies, quickly made clear that a deal among the 17 euro countries and whoever else wanted to join was better than nothing.
The immediate market response was lukewarm, with stock markets in Asia and Europe down sharply — the Stoxx 50 of leading European shares was trading 0.5 percent lower soon after the open while the euro is down 0.4 percent at $1.3303.
Markets may be worried that the failure of the EU to get unanimous support for more stringent budgetary rules may rattle the foundations of a union created to foster peace and prosperity across Europe following World War II.
French President Nicolas Sarkozy laid the blame at the feet of British Prime Minister David Cameron.
“David Cameron made a proposal that seemed to us unacceptable, a protocol to the treaty that would have exonerated the United Kingdom from a great number of financial service regulations,” Sarkozy said shortly before dawn, after what he called a “difficult” dinner meeting had dragged through the night.
“We couldn’t accept this. We consider to the contrary that part of the troubles of the world come from the lack of regulation of financial services,” Sarkozy said. “If you want an opt-out clause to not be in the euro and ask to participate in all decisions of the euro ... and even criticize it, this is not possible.”
Cameron defended his stance.
“What was on offer is not in Britain’s interest so I didn’t agree to it,” he told reporters in Brussels.
“We’re not in the euro and I’m glad we’re not in the euro,” he said. “We’re never going to join the euro and we’re never going to give up this kind of sovereignty that these countries are having to give up.”
The French president said work was proceeding on an “intergovernmental accord” among the 17 countries that use the euro plus as many as six others, not counting Britain, Hungary, and so-far undecided Czech Republic and Sweden.
Swedish Prime Minister Fredrik Reinfeldt signaled after the meeting it was unlikely his country would join the accord.
“It would be very odd signing up to a treaty pointing out as if we were a eurozone country,” he told The Associated Press. “And that was never the aim.”
The governments signing onto the new treaty will have to agree to allow unprecedented intervention in national budgets by EU-wide bodies.
According to a statement issued after the meeting broke up, governments participating in the agreement will need to have balanced budgets — which is counted as a structural deficit no greater than 0.5 percent of gross domestic product — and will have to amend their constitutions to include such a requirement.
The treaty will include an unspecified “automatic correction mechanism” for countries that break the rules, the statement said.
In addition, countries that run deficits larger than 3 percent will face sanctions.
To prevent such deficits, countries will have to submit their national budgets to the European Commission, which will have the authority to request that they be revised. Countries will also have to report in advance how much they plan to borrow.
But Cameron threatened to complicate the new 23-member treaty.
“The institutions of the European Union belong to the European Union, belong to the 27” member states, he said. The new treaty would rely on the European Commission and the European Court of Justice to enforce its rules.
Despite the challenges ahead, German Chancellor Angela Merkel praised the deal.
“I have always said the 17 states of the eurogroup have to regain credibility,” she said. “And I believe with today’s decisions this can and will be achieved.”
European Central Bank chief Mario Draghi said also called the accord a good result for the eurozone. Draghi’s opinion carries some weight as a more active role by the ECB in keeping struggling countries’ borrowing costs in check is seen by many economists as the quickest relief for the eurozone’s problems.
The summit meeting in Brussels was viewed as a critical step in the effort to save the euro. The currency is losing the trust of the international financial markets, who fear that some debt-laden euro countries may ultimately be unable to pay their debts.
That doubt means that the governments of countries viewed as in a precarious state must pay higher interest to borrow the money they need to carry on — and that, in turn, makes their budget deficits even worse and can be unsustainable in the long run.
Germany and France insist that the best way of regaining market trust is to beef up the financial governance overseeing the eurozone countries and their budgets. Any intergovernmental treaty will be an effort to ensure that national budgets are brought into balance and large debts are not run up again.
But many other countries, and economists, argue that to regain the trust of investors in the short-term the eurozone needs to have enough money on hand to guarantee that countries won’t default on their debts.
Toward that end, Herman Van Rompuy, president of the European Council, said the eurozone, together with some other EU countries, would provide up to €200 billion ($268 billion) in extra resources to the International Monetary Fund, to be used to help countries in dire straits. Non-euro countries Sweden and Denmark already said they would contribute some extra money.
However, there was no agreement on boosting the eurozone’s own bailout funds, meant to rescue countries having trouble refinancing their debts. In their statement, the currency union’s leaders put it off until March to decide whether their rescue funds need to be able to provide more than €500 billion in help to struggling countries.
Sarkozy said the EU’s two bailout funds — the European Financial Stability Facility, or EFSF, and the European Stability Mechanism, or ESM — would be managed by the European Central Bank, though the details still need to be worked out.
The failure to get agreement among all 27 EU members came despite a marathon negotiating session. The 27 EU presidents and prime ministers began their talks at 7:30 Thursday evening and continued past 4:30 a.m.
