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European states sign new fiscal treaty

The leaders hope the accord, known as the fiscal compact, will also lead the way toward closer political and economic integration in the eurozone.

twitter-logo Associated Press   Brussels     Last Updated: March 2, 2012  | 16:10 IST

The leaders of 25 European states on Friday signed a new treaty designed to prevent the 17 euro countries from living beyond their means and prevent a repeat of the currency union's crippling debt crisis.

The leaders hope the accord, known as the fiscal compact, will also lead the way toward closer political and economic integration in the eurozone.

"It will bring us, as it were, the economic and monetary union that is finally walking on two legs," said European Council President Herman Van Rompuy, who oversaw the drafting of the treaty.

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Only Britain and the Czech Republic decided not to sign the agreement, triggering some concern over a rift in the 27-country European Union.

The fact that not all EU states backed the new rules forced the others to set them up in a separate treaty, rather than integrating them into EU law. That prevents its signatories from taking advantage of some of the bloc's established institutions, such as the European Commission, the EU's executive that usually oversees the implementation of EU law.

After a relatively smooth drafting process, the most difficult part of bringing the new rules into force begins. All participating governments have to ratify the treaty at home - a process that may prove difficult in some places.

Many Europeans have grown weary of the EU and the euro. Two years of painful austerity in the poorer countries have taken their economic toll, while many in the richer countries are getting frustrated over funding the expensive bailouts for Greece, Ireland and Portugal.

Others fear that the tighter spending rules - including a prohibition of deficits of more than 0.5 percent of annual output - will limit governments' room to manoeuver in tough economic times and force German-style fiscal discipline on countries with vastly different economies and cultures.

However, the new deficit limits make some exceptions, such as for severe recessions and other unexpected economic circumstances.

"You now all have to convince your Parliaments and voters that this treaty is an important step to bring the euro durably back into safe waters. I am most confident you will succeed," Van Rompuy told the heads of state and government. "The treaty is short and sharp. Its benefits are clear. And above all, you are all gifted politicians, otherwise you would not be here."

The biggest challenge may lie in Ireland, which called a referendum on the accord earlier this week. The country's voters have already tripped efforts toward closer European integration twice in the past.

However, Europe's leaders say they have prepared for such a case. The treaty can come into force once at least 12 euro countries have ratified it.

At the same time, financial aid from the eurozone's new bailout fund, the European Stability Mechanism, is limited to states that have enacted the accord. That provision may be of particular significance for Ireland, which has already received a euro 67.5 billion ($89.9 billion) bailout from the eurozone and the International Monetary Fund and which economists fear may need further rescue loans in the future.

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