December 9, 2011
By STEVEN ERLANGER and STEPHEN CASTLE
BRUSSELS — European leaders, meeting until the early hours of Friday, agreed to sign an intergovernmental treaty that would require them to enforce stricter fiscal and financial discipline in their future budgets. But efforts to get unanimity among the 27 members of the European Union, as desired by Germany, failed as Britain refused to go along.
Importantly, all 17 members of the European Union that use the euro agreed to the new treaty, along with six other countries who wish to join the currency union one day. Two countries, the Czech Republic and Sweden, said they would want to talk to their parties and parliaments at home before deciding, said President Nicolas Sarkozy of France, but it seemed unlikely that Sweden would join. Hungary said it wanted to examine the details, leaving Britain isolated.
Though not a perfect solution, because it could be seen as institutionalizing a two-speed Europe, the intergovernmental pact could be ratified much more quickly by parliaments than a full treaty amendment. Crucially, the deal was welcomed immediately by the new head of the European Central Bank, Mario Draghi.
“It is a very good outcome for euro area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries,” Mr. Draghi said early Friday morning.
The support of Mr. Draghi and the bank to continue to buy the bonds of troubled large countries like Italy and Spain is crucial to buy time for their economic adjustment and restructuring, to reduce their debt and avoid a collapse of the euro.
The outcome was a significant defeat for David Cameron, the British prime minister, who had sought assurances to protect Britain’s financial services sector in exchange for doing a deal. Mr. Sarkozy said that “David Cameron requested something we all considered unacceptable, a protocol in the treaty allowing the U.K. to be exempted for a certain number of financial regulations.”
Mr. Cameron said, “What was on offer wasn’t in British interests, so I didn’t agree to it.” He conceded that there were risks with others going ahead to form a separate treaty, but added, “We will insist that the E.U. institutions, the court and the Commission work for all 27 nations of the E.U.”
The prime minister seemed to be betting that his unhappy coalition partners, the Liberal Democrats, would not bolt over the issue, and that calculation seemed to be right. On Friday, the party’s leader, Nick Clegg, said that as much as he regretted the turn of events, Mr. Cameron’s demands had been “modest and reasonable.”
The European Council president, Herman Van Rompuy, said that in addition, the leaders agreed to provide an additional 200 billion euros to the International Monetary Fund to help increase a “firewall” of money in European bailout funds to help cover Italy and Spain. He also said a permanent 500 billion euro European Stability Mechanism would be put into effect a year early, by July 2012, and for a year, would run alongside the existing and temporary 440 billion euro European Financial Stability Facility, thus also increasing funds for the firewall.
The leaders also agreed that private sector lenders to euro zone nations would not automatically face losses, as had been the plan in the event of another future bailout. When Greece’s debt was finally restructured, the private sector suffered, making investors more anxious about other vulnerable economies.
Mr. Sarkozy said that the institutions of the European Union would be able to police the new pact, though Britain may dispute that.
Chancellor Angela Merkel of Germany, who pressed hard for a treaty that would codify and enforce debt limits and central oversight of national budgets, said the decisions made here will result in increased credibility for the euro zone. “I have always said the 17 states of the euro zone need to win back credibility,” she said. “And I think that this can happen, will happen, with today’s decisions.”
European financial markets strengthened mildly on word of the agreement. The Euro Stoxx 50 index, a barometer of euro zone blue chips, gained 1.5 percent, while broader barometers rose slightly, and stocks rose in early United States trading as well. The euro’s value strengthened to $1.3369, up from $1.3338 on Thursday. In the bond market, the borrowing costs of the euro region’s two most closely watched debt-ridden economies, Italy and Spain, were little changed.
President Obama said on Thursday that the European leaders’ efforts to reach a long-term “fiscal compact where everybody’s playing by the same rules” were “all for the good.” Yet he added, “But there’s a short-term crisis that has to be resolved to make sure that markets have confidence that Europe stands behind the euro.”
The best hope for providing that shot of confidence has been seen as the European Central Bank. But the bank’s president, Mr. Draghi, at a news conference in Frankfurt on Thursday, seemed to back away from signals he sent last week that a grand bailout bargain might be in the works — a big infusion from the central bank in exchange for a commitment to greater fiscal discipline from the European heads of state.
On Thursday, Mr. Draghi said that he was “surprised” that a speech he made last week had been widely interpreted as meaning the central bank stood ready to shore up weak European Union members like Italy and Spain by buying many more of their bonds — or to possibly work in concert with the International Monetary Fund. He played down the I.M.F. idea Thursday as too “legally complicated” and said it might violate the spirit of the euro treaty.
Many analysts were stunned by what appeared to be Mr. Draghi’s turnaround, which they said would make it even more crucial for the European heads of state to forge a market-calming master plan at their summit meeting — as unlikely as such an outcome is starting to look.
“While Draghi had opened the door for more E.C.B. support last week, he closed it again today,” Carsten Brzeski, an economist at the Dutch bank ING, wrote in a note to clients. “According to Draghi, it was up to politicians to solve the debt crisis.”
For now, Mr. Draghi appears to be leaving any government bailouts to the heads of state, while focusing the European Central Bank’s efforts on the less controversial business of keeping money flowing through commercial banks.
The main step the central bank took Thursday, which buoyed stock markets before Mr. Draghi held his news conference, was to cut its main interest rate to 1 percent, from 1.25 percent. That returned the rate to the record low level that had prevailed from 2009 until April. Mr. Draghi did not rule out the possibility that the rate could go even lower.
The central bank also announced additional measures to aid euro zone banks suffering from a dearth of the short-term lending and to avert a credit squeeze. The European Central Bank said it would start giving commercial banks loans for three years, compared with a maximum of about one year previously. Banks will be able to borrow as much as they want at the benchmark interest rate.
They must provide collateral, but the central bank on Thursday also broadened the range of securities it accepts, which will help banks that have large amounts of assets that are hard to sell. The central bank also eased its requirements for reserves that banks must maintain, which frees more cash.
In a sign of how badly banks need the money, 34 institutions took advantage of a new lower interest rate offered by the European Central Bank in conjunction with other central banks for three-month loans denominated in dollars.
Earlier Thursday, the Bank of England held its benchmark rate steady at a record low 0.5 percent, after the bank’s governor warned of growing risks for Britain’s economy from the euro area. Mr. Draghi, who took over at the European Central Bank from Jean-Claude Trichet on Nov. 1, has wasted little time reversing rate increases that Mr. Trichet oversaw in April and July. Those increases were widely criticized as an overreaction to tentative signs of inflation and may have helped hasten a widespread economic slowdown in Europe.
The economy of the 17 countries in the euro currency union is almost stagnant, growing just 0.2 percent in the third quarter, with unemployment at 10.3 percent. Economists expect the euro zone economy to slip into recession early next year if it has not happened already. Declining output makes the debt crisis even worse by cutting tax receipts.
The E.C.B. lowered its growth projections Thursday, saying that output could fall as much as 0.4 percent next year.
Lower interest rates will be particularly welcome in countries like Portugal and Italy, where the debt crisis has pushed up interest rates and made it harder for businesses to get loans. And the cuts will provide immediate relief to the many homeowners in Ireland and other euro countries who have variable-rate mortgages tied to the central bank’s rate.
But many economists continue to argue that ultimately the European Central Bank will have to intervene more aggressively in the region’s government bond markets, to prevent borrowing costs for Italy and other countries from becoming so high that they are unable to refinance their debt.
Jack Ewing contributed reporting from Frankfurt, and Mark Landler from Washington.
Europe Moves Ahead With Fiscal Union, UK Isolated
Published: Friday, 9 Dec 2011 | 9:17 AM ET
Europe divided on Friday in a historic rift over building a closer fiscal union to preserve the euro, with an overwhelming majority of countries led by Germany and France agreeing to forge ahead with a separate treaty, leaving the EU’s third biggest economy Britain isolated.
The outcome of a two-day European Union summit left financial markets uncertain whether and when more decisive action would be taken to stem a debt crisis that began in Greece, spread to Portugal, Ireland, Italy and Spain and now threatens France and even economic powerhouse Germany.
A new treaty could take three months to negotiate and may require referendums in some countries. Two ECB sources told Reuters the European Central Bank would keep purchases of euro zone government bonds capped for now and not take extra action. Debt markets were wary. Interbank lending rates eased but Italian 10-year bond yields remained around 6.5 percent.
Twenty-six of the 27 EU leaders agreed to pursue tighter integration with stricter budget discipline in the single currency area, but Britain said it could not accept proposed EU treaty amendments after failing to secure concessions.
After 10 hours of talks that ran into the early hours of Friday, all 17 members of the euro zone and nine countries that aspire to join resolved to negotiate a new agreement alongside the EU treaty with a tougher deficit and debt regime to avoid a repetition of the debt crisis in future.
The nine non-euro states said they would consult their parliaments, where appropriate, on taking part in the process. After a long night of wrangling, Britain’s few allies melted away in the Brussels dawn.
“Not Europe, Brits divided. And they are outside of decision making. Europe is united,” Lithuanian President Dalia Grybauskaite said in blunt English. One senior EU diplomat called British Prime Minister David Cameron’s negotiating tactics “clumsy”.
Among other issues, he had sought a right to veto a proposed financial transaction tax, which may be voted through by a majority over the objections of the City of London financial center.
ECB President Mario Draghi called the decision a step forward for the stricter budget rules he has said are necessary for the euro zone to emerge stronger from the turmoil.
“It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members,” Draghi said. “We came to conclusions that will have to be fleshed out more in the coming days.”
Two ECB sources said the bank’s governing council decided on Thursday to keep bond buying limited to around 20 billion euros a week and there was no need to review the decision in the light of the summit outcome.
“You will see some further purchases but not the huge bazooka that some people in the markets and the media are awaiting,” one central banker told Reuters on condition of anonymity.
But French President Nicolas Sarkozy told reporters the ECB’s move to provide unlimited three-year funds to cash-starved European banks would be more effective, by enabling them to continue buying government bonds.
“This means that each state can turn to its banks, which will have liquidity at their disposal,” he said.
“Seethes, Sulks, Gloats”
German Chancellor Angela Merkel said she was satisfied with the decisions. The world would see that Europe had learned from its mistakes and avoided “lousy compromise”, she said.
Europe’s most powerful leader said she had not given up hope that Britain would eventually agree to change the EU treaty to anchor stricter budget discipline, with automatic sanctions for deficit offenders.
Sarkozy sounded elated at having united a big group around the euro zone as the EU’s core, long a French objective.
“This is a summit that will go down in history,” he said.
“We would have preferred a reform of the treaties among 27. That wasn’t possible given the position of our British friends. And so it will be through an intergovernmental treaty of 17, but open to others.”
One EU diplomat summed up the outcome as: “Britain seethes, Germany sulks, and France gloats.”
Active ECB support will be vital in the coming days with markets doubting the strength of Europe’s financial firewalls to protect vulnerable economies such as Italy and Spain, which have to roll over hundreds of billions of euros in debt next year.
Irish Europe Minister Lucinda Creighton said Dublin and many other member states expect the central bank to take a more pro-active approach to the debt crisis in the weeks ahead. Traders said the ECB bought Italian bonds on Friday to steady markets.
Creighton also said there was a 50/50 chance that Ireland would have to hold a referendum on ratifying a fiscal union treaty. Irish voters have rejected EU treaties twice in the last decade in plebiscites, holding up their entry into force, only to reverse their vote later under strong European pressure.
Voters in any referendum this time will cast their ballots in the knowledge that Ireland is receiving an EU bailout, and that it will not be able to prevent other countries going ahead without it.
The euro rallied in Europe but analysts said the summit had done little to convince markets that a solution to the crisis was at hand.
Asked if the euro was safe now, Polish Prime Minister Donald Tusk said: “I’m not sure.”
Merkel and French President Nicolas Sarkozy had wanted to get the whole EU to agree to change the Lisbon treaty so that automatic sanctions to back budget and debt rules for eurozone states could be enshrined in the bloc’s basic law.
But Britain, which is outside the euro zone, refused to back the move, demanding guarantees in a protocol protecting its financial services industry, roughly one-tenth of the country’s economy. Sarkozy described Cameron’s demand as unacceptable.
Cameron hinted London may now try to prevent the others from using the executive European Commission and the European Court of Justice, saying: “Clearly the institutions of the European Union belong to the European Union, they belong to the 27.”
The rift may increase pressure from Eurosceptics within Cameron’s Conservative party and outside it for Britain to hold a referendum on leaving the EU, which it joined in 1973. The prime minister strongly opposes such a course, which he has said would be disastrous for British interests.
Britain conducts more than half of its trade within the EU and would suffer economically if it lost its privileged access to the single market.
Herman Van Rompuy, the president of the European Council and the summit chairman, focused on the success in securing agreement for tighter fiscal limits, including the need for countries to bring budgets close to balance.
“It means reinforcing our rules on excessive deficit procedures by making them more automatic. It also means that member states would have to submit their draft budgetary plans to the (European) Commission,” 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,” he said.
But it could still take months of wrangling, with countries like Finland and Slovakia opposing a Franco-German drive to take decisions on future bailouts by an 85 percent supermajority to avoid being taken hostage by a single small country.
In a meeting billed as a last chance to save the euro, with financial markets unconvinced by policymakers’ efforts to tackle the region’s problems so far, the leaders also took several decisions on the permanent bailout fund, the European Stability Mechanism, which will come into force a year early in July 2012.
The ESM’s capacity will be capped at 500 billion euros ($666 billion), less than had been suggested was possible before the summit, and the facility will not get a banking license, as Van Rompuy originally had proposed, due to German opposition.
It also was agreed that EU countries would provide up to 200 billion euros in bilateral loans to the International Monetary Fund (IMF) to help it tackle the crisis, with 150 billion euros of the total coming from the euro zone countries.
“We can be very pleased at the result,” IMF Managing Director Christine Lagarde said as she left the summit.
Cameron’s decision to stay out of the treaty-change camp could spell problems for Britain. The danger is that if a large majority of EU countries do push ahead with deeper integration, it could involve changes to the single market and financial regulation, both of which could have a profound impact on the British economy.
“Cameron was clumsy in his maneuvering,” a senior EU diplomat said. It may be possible that Britain will shift its position in the days ahead if it discovers that isolation really is not a viable course of action, diplomats said.
At the same time, if Britain does stay out, not only could it mark an irrevocable split with the European Union, which it joined nearly 40 years ago, but it will leave the rest of the EU and euro zone to institutionalize a ‘two-speed’ Europe.
Earlier, the plight of Europe’s banks was thrown into sharp relief. The European Banking Authority told them to increase their capital by a total of 114.7 billion euros, significantly more than predicted two months ago.
A Reuters poll of economists found that while 33 out of 57 believe the euro zone will probably survive in its current form, 38 of those questioned expected this week’s summit would fail to deliver a decisive solution to the debt crisis.