Leaders of the European Union’s 27 countries failed to agree to change the EU’s treaties in order to impose tighter fiscal rules on the eurozone and instead chose to create a new intergovernmental treaty which will probably have less teeth and be negotiated only among 23 members.
Despite the division – which will leave Britain out of the new pact, with the Czech Republic, Hungary and Sweden still weighing participation – Mario Draghi, the European Central Bank president, signalled his approval, a key vote of confidence that could allow the ECB to move more aggressively in eurozone bond markets.
Still, without agreement among all 27 countries, it remained unclear how the new fiscal rules the summit leaders promised to follow would be enforced. EU institutions – most importantly, the European Commission, which oversees and passes judgement on such rules in Brussels – legally cannot have a formal role in any agreement outside the EU treaties.
José Manuel Barroso, the Commission president, said he believed there were ways to work around such legal prohibitions, but senior EU officials acknowledged it would be difficult to give Brussels new powers over eurozone national budgets outside the EU treaties, and diplomats expressed concern financial markets would not see the new pact as credible.
In the end, diplomats said, it was the UK that became the biggest stumbling block to a deal between all 27 countries, with Britain’s prime minister David Cameron holding out for hours in the hope of getting concessions for the UK’s financial services industry.
“Very simply, in order to accept the reform of the treaty at 27, David Cameron asked for what we thought was unacceptable: a protocol to exonerate the UK from financial services regulation,” said Nicolas Sarkozy, the French president. “We could not accept this as at least part of the problems [Europe is facing] came from this sector.”
Several diplomats said Mr Cameron emerged from Friday morning’s negotiations deeply wounded, angering fellow EU leaders and getting no trade-offs for British interests.
“This is going to cost the UK dearly,” said one senior EU official. “They have antagonised everyone.”
Mr Cameron defended his hard-line stance in a hastily-called news conference following the summit, and insisted that he had not ruptured relationships with his counterparts.
“I had to pursue very doggedly what was in British national interest,” Mr Cameron said. “It is sometimes the right thing to say, ‘I cannot do that, it is not in our national interest, I don’t want to put that in front of my parliament because I don’t think I can recommend it with a clear conscience, so I am going to say no and exercise my veto’.”
Herman Van Rompuy, the European Council president, sought to highlight new short-term efforts agreed on Thursday night – the first evening of the two-day summit – including €200bn in new EU funding for the International Monetary Fund, which will come from eurozone countries and some non-euro members, including the UK.
The cash is expected to go into a new IMF fund to help countries struggling to deal with the growing liquidity freeze.
EU leaders are expected to seek contributions from other countries outside Europe, and Christine Lagarde, the IMF managing director, said the money would be used to support the Fund’s “global membership” – a key requirement for the UK, which does not want the aid specifically targeted to the eurozone. “These resources will enhance the IMF’s capacity to fulfil its systemic responsibilities in support of its global membership,” Ms Lagarde said in a statement.
But other short-term measures that Mr Van Rompuy had proposed ahead of the summit – including running two eurozone bail-out funds in tandem to increase EU rescue resources, and giving the eurozone’s new €500bn rescue facility access to ECB funding – were either rejected or set aside for later debates.
As expected, EU leaders also decided to excise language in the rules governing the new rescue fund, called the European Stability Mechanism, that would have required bondholder losses in eurozone countries deemed insolvent.
“Our first approach to [bondholders]…is now officially over,” Mr Van Rompuy said. The ESM, which originally was to come into force in mid-2013, will now begin operation in July, officials said.
The text of the new intergovernmental treaty is expected to be completed by March, with complex national ratifications to follow. Mr Sarkozy said that while the intergovernmental treaty amounted to a “lighter” reform, it could also be quicker. Full-bore EU treaty change can take years, and Mr Van Rompuy said the new treaty could be completed much more quickly.
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