EU Forges Ahead with New Treaty for Tighter Fiscal Union, Leaving Britain Behind

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Europe divided on Friday in a historic rift that will leave Britain isolated while a large majority of countries led by Germany and France agreed to forge ahead with plans for a new treaty that will create a tighter fiscal union, which leaders hope will preserve the euro.

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Twenty-three of 27 leaders representing each state in the union agreed to pursue tighter integration with stricter budget rules for the single-currency area, while Britain said it could not accept proposed amendments to the EU treaty after failing to secure concessions for itself. Sweden, Hungary, and the Czech Republic said they needed to consult their parliaments before making a decision.

After ten hours of talks that went through the night, all 17 members of the euro zone, as well as six countries that aspire to join, resolved to negotiate a new agreement alongside the EU treaty that would impose a tougher deficit and debt regime.

German Chancellor Angela Merkel, who created the fiscal compact proposal with French President Nicolas Sarkozy, said she was very satisfied with the decisions. The world will now see that Europe has learned from its mistakes while avoiding a “lousy compromise,” she said, adding that she still hopes Britain will eventually agree to change the EU treaty to anchor stricter budget discipline.

The support of the European Central Bank will be vital in the coming days as markets question the ability of Europe’s financial firewalls to protect vulnerable economies such as Italy and Spain, both of which roll over hundreds of billions of euros in debt next year.

“It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members,” said ECB President Mario Draghi, speaking of the agreement reached today at a summit in Brussels. “We came to conclusions that will have to be fleshed out more in the coming days.”

Ireland’s Minister of State for European Affairs, Lucinda Creighton, said Dublin expects the central bank to take a more pro-active approach to the debt crisis in weeks ahead than that announced after yesterday’s policy meeting. Traders said the ECB bought Italian bonds to steady Markets today.

Ahead of the summit, Draghi called on EU leaders to create a “fiscal compact,” spurring investor hopes that the ECB would engage in a massive bond-buying program should leaders successfully assert tighter budgetary discipline on distressed euro-zone states. However, he discouraged that interpretation in a speech on Thursday where he announced new policy decisions after a meeting of the ECB Governing Council.

When asked what more the central bank could do to support the euro zone, ECB policymaker Ewald Nowotny said, “I think intelligent people always think over lots of things, but it is about what we decided yesterday.”

Merkel and Sarkozy wanted to get the whole EU to agree to change the Lisbon treaty, which amended the Treaty on European Union in December 2007, so that stricter budget and debt rules could be integrated into the bloc’s basic law. But without the support of Britain, participating members will have to create a new treaty.

Cameron refused to back the move, saying Britain needed guarantees in a protocol protecting its financial services industry, which accounts for roughly one-tenth of its economy. Sarkozy said Cameron’s demand was unacceptable.

Cameron hinted that he may try to prevent the others from using the European Commission and the European Court of Justice, saying that “clearly the institutions of the European Union belong to the European Union, they belong to the 27.”

The rift may widen, increasing pressure on Cameron’s Conservative party to hold a referendum on leaving the EU, which it joined in 1973, though the prime minister has said he strongly opposes such a course.

In total, Merkel and Sarkozy expect that up to 25 of the 27 euro nations, excepting only Britain and perhaps Hungary, will forge ahead with an intergovernmental treaty.

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“This is a summit that will go down in history,” said Sarkozy. “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.”

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