BRUSSELS—European Union leaders Friday agreed to forge ahead with a new deal on economic governance without the support of the U.K., but they again balked at marshalling the large sums experts believe will be necessary to ensure financing for Italy and Spain and prevent a collapse of the euro zone.
The 17 countries of the euro zone formally agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don't enforce such discipline properly.
But opposition to the accord meant the new fiscal rules will have to operate as an intergovernmental agreement instead of being enforced through a treaty change, which would have required unanimous support.
All EU member nations but the U.K. indicated they may join the euro-zone fiscal agreement, although some will have to consult their parliaments.
"We have taken an important first step towards permanent euro stability," German Chancellor Angela Merkel told reporters after a two-day summit in Brussels.
The 27 governments also agreed that they would move to raise up to €200 billion for the International Monetary Fund that could be used for lending to euro-zone governments.
The details of this arrangement will be fixed in the coming weeks, including how much, if any of the funding would be earmarked for the euro zone.
But the governments couldn't agree to raise the €500 billion cap on the euro zone's bailout lending capacity.
Germany remains staunchly against the idea, which could ensure up to €700 billion in lending for Italy, Spain and recapitalizing euro-zone banks.
The governments agreed to discuss the proposal again in March."I know the crisis won't be solved in one summit, and I'm saying that again," said Ms. Merkel.
The agreement on tougher fiscal rules at Friday's summit, which had been billed as a last-ditch effort to save the euro, was hailed as a breakthrough by Ms. Merkel but fell flat investors, who appear to remain convinced that only the European Central Bank can rescue the single currency.
A spike in debt yields Friday forced the ECB to intervene to prop up both Italian and Spanish bonds. Italian two-year yields rose to 6.26% and Spanish ones to 4.90%, before ECB intervention drove them back down to 6.06% and 4.63%. The euro meanwhile rose only modestly.
"The only question that the market is currently asking is whether the political deal opens the way for more forceful intervention by the ECB in the sovereign debt market," said Jacques Cailloux, chief euro-zone economist with Royal Bank of Scotland in London.
Mr. Cailloux said that while such intervention couldn't be ruled out, ECB President Mario Draghi had sent a very clear message Thursday that major intervention from the central bank is unlikely.
In the meantime, the governments hope steps taken by the ECB Thursday to provide longer-term loans to banks will in turn help troubled governments finance their debts.
"Thanks to the decisions of the central bank, the Italian government could ask Italian banks to finance part of its debt at rates that are incontestably less high than the market rates today," French President Nicolas Sarkozy said early Friday morning.
The ECB's new program will allow banks to borrow long term at 1% rates, leaving plenty of room for them to buy Italian debt at rates below the current market yields over 6%, he said.
The idea of "euro bonds"—jointly guaranteed debt that could provide funding for individual governments—remains under consideration, Greek Prime Minister Lucas Papademos said Friday.
"The discussion on common bond issuance is still on, it's not out of the question," he said.
Euro bonds could be a key topic at a summit scheduled for March, said Italian Prime Minister Mario Monti, a longtime champion of the idea. "It would be incoherent" to rule out euro-zone bonds in advance of a move towards greater fiscal integration, he said.
The new intergovernmental agreement will set automatic penalties for countries that violate the EU's government deficit limit of 3% of gross domestic product and total debt limit of 60% of GDP.
The new agreement would also require national governments to enshrine the "Golden Rule"—a prohibition on governments running "structural deficits" above 0.5% of gross domestic product—into national constitutions or equivalent national legal systems.
The European Court of Justice will have the power to enforce national governments' adherence to the rule.
A structural deficit is the budget deficit adjusted for changes in the business cycle. The commission will need to come up with a more precise definition of the Golden Rule, Belgian Prime Minister Elio Di Rupo said.
Changing the bloc's economic governance rules through an intergovernmental agreement, rather than a whole new treaty, will be fast, even if it isn't the first choice for the bloc's executive arm, European Commission President Jose Manuel Barroso said Friday.
"Going through this way is quicker...in terms of institutional role many things can be done in this treaty, but some are legally complex," Mr. Barroso told reporters after a meeting of European Union leaders here.
European Council President Herman van Rompuy said that as many as 26 of the 27 EU member states could approve the deal.
"I know it's going to be very close to 27, in fact 26 leaders are in favor of joining this effort, they recognize the euro is a common good," Mr. Van Rompuy said, adding the aim is to ratify the treaty on the European Stability Mechanism, the bloc's permanent bailout mechanism, by mid-2012.
A number of non euro-zone governments, including Hungary, Sweden and the Czech Republic, will discuss the pact with their parliaments before signing on.
U.K. Prime Minister David Cameron said Friday that the U.K. won't agree to the creation of a new EU treaty because of concerns, among others, that the deal would limit the government's discretion over financial regulation.
Mr. Van Rompuy opened the door to future expansion of the EU, following Croatia's signature of an accession treaty earlier Friday.
"Serbia has made considerable process, it has taken bold steps to bring Europe's war criminals to international justice," he said. "In February of 2012 [candidate status] can be signed by the council and confirmed in beginning of March."
He said that nearby Montenegro has "undertaken many domestic reforms, and we are aiming to open accession negotiations in June 2012.
wsj.com
The 17 countries of the euro zone formally agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don't enforce such discipline properly.
But opposition to the accord meant the new fiscal rules will have to operate as an intergovernmental agreement instead of being enforced through a treaty change, which would have required unanimous support.
All EU member nations but the U.K. indicated they may join the euro-zone fiscal agreement, although some will have to consult their parliaments.
"We have taken an important first step towards permanent euro stability," German Chancellor Angela Merkel told reporters after a two-day summit in Brussels.
The 27 governments also agreed that they would move to raise up to €200 billion for the International Monetary Fund that could be used for lending to euro-zone governments.
The details of this arrangement will be fixed in the coming weeks, including how much, if any of the funding would be earmarked for the euro zone.
But the governments couldn't agree to raise the €500 billion cap on the euro zone's bailout lending capacity.
Germany remains staunchly against the idea, which could ensure up to €700 billion in lending for Italy, Spain and recapitalizing euro-zone banks.
The governments agreed to discuss the proposal again in March."I know the crisis won't be solved in one summit, and I'm saying that again," said Ms. Merkel.
The agreement on tougher fiscal rules at Friday's summit, which had been billed as a last-ditch effort to save the euro, was hailed as a breakthrough by Ms. Merkel but fell flat investors, who appear to remain convinced that only the European Central Bank can rescue the single currency.
A spike in debt yields Friday forced the ECB to intervene to prop up both Italian and Spanish bonds. Italian two-year yields rose to 6.26% and Spanish ones to 4.90%, before ECB intervention drove them back down to 6.06% and 4.63%. The euro meanwhile rose only modestly.
"The only question that the market is currently asking is whether the political deal opens the way for more forceful intervention by the ECB in the sovereign debt market," said Jacques Cailloux, chief euro-zone economist with Royal Bank of Scotland in London.
Mr. Cailloux said that while such intervention couldn't be ruled out, ECB President Mario Draghi had sent a very clear message Thursday that major intervention from the central bank is unlikely.
In the meantime, the governments hope steps taken by the ECB Thursday to provide longer-term loans to banks will in turn help troubled governments finance their debts.
"Thanks to the decisions of the central bank, the Italian government could ask Italian banks to finance part of its debt at rates that are incontestably less high than the market rates today," French President Nicolas Sarkozy said early Friday morning.
The ECB's new program will allow banks to borrow long term at 1% rates, leaving plenty of room for them to buy Italian debt at rates below the current market yields over 6%, he said.
The idea of "euro bonds"—jointly guaranteed debt that could provide funding for individual governments—remains under consideration, Greek Prime Minister Lucas Papademos said Friday.
"The discussion on common bond issuance is still on, it's not out of the question," he said.
Euro bonds could be a key topic at a summit scheduled for March, said Italian Prime Minister Mario Monti, a longtime champion of the idea. "It would be incoherent" to rule out euro-zone bonds in advance of a move towards greater fiscal integration, he said.
The new intergovernmental agreement will set automatic penalties for countries that violate the EU's government deficit limit of 3% of gross domestic product and total debt limit of 60% of GDP.
The new agreement would also require national governments to enshrine the "Golden Rule"—a prohibition on governments running "structural deficits" above 0.5% of gross domestic product—into national constitutions or equivalent national legal systems.
The European Court of Justice will have the power to enforce national governments' adherence to the rule.
A structural deficit is the budget deficit adjusted for changes in the business cycle. The commission will need to come up with a more precise definition of the Golden Rule, Belgian Prime Minister Elio Di Rupo said.
Changing the bloc's economic governance rules through an intergovernmental agreement, rather than a whole new treaty, will be fast, even if it isn't the first choice for the bloc's executive arm, European Commission President Jose Manuel Barroso said Friday.
"Going through this way is quicker...in terms of institutional role many things can be done in this treaty, but some are legally complex," Mr. Barroso told reporters after a meeting of European Union leaders here.
European Council President Herman van Rompuy said that as many as 26 of the 27 EU member states could approve the deal.
"I know it's going to be very close to 27, in fact 26 leaders are in favor of joining this effort, they recognize the euro is a common good," Mr. Van Rompuy said, adding the aim is to ratify the treaty on the European Stability Mechanism, the bloc's permanent bailout mechanism, by mid-2012.
A number of non euro-zone governments, including Hungary, Sweden and the Czech Republic, will discuss the pact with their parliaments before signing on.
U.K. Prime Minister David Cameron said Friday that the U.K. won't agree to the creation of a new EU treaty because of concerns, among others, that the deal would limit the government's discretion over financial regulation.
Mr. Van Rompuy opened the door to future expansion of the EU, following Croatia's signature of an accession treaty earlier Friday.
"Serbia has made considerable process, it has taken bold steps to bring Europe's war criminals to international justice," he said. "In February of 2012 [candidate status] can be signed by the council and confirmed in beginning of March."
He said that nearby Montenegro has "undertaken many domestic reforms, and we are aiming to open accession negotiations in June 2012.
wsj.com
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