Unit 4: UK alone as EU agrees fiscal deal

The European Union has decided to deepen its ties to hopefully sort out the mess that is the Eurozone. This clip and article help explain the fiscal issues that the EU faces. This could be a typical question in any unit 4 exam (and a Unit 4 Politics question, but that's for another day). (See points for discussion below)

Questions for discussion:

1. How will a common fiscal policy help the European Union?
2. What are the consequences of a toughter fiscal stance in the EU? (Think short term / long term)
3. What does the New York Times mean by a 'Two Speed Europe'?

European leaders say 26 out of 27 EU member states have backed a tax and budget pact to tackle the eurozone debt crisis.

 

Only the UK has said it will not join. Prime Minister David Cameron said he had to protect key British interests, including its financial markets.

 

The 17 countries that use the euro have all agreed to the deal.

 

Nine other countries have said they will sign up, some pending consultations with their parliaments.

 

Hungary originally said it would also remain outside the deal but has now changed its stance.

 

'Stable euro'

 

The UK effectively used its veto to block an attempt, led by the French and Germans, to get all 27 EU states to support changes to the union's treaties.

 

This was a night of political drama, and the long-term implications of what happened will be debated for months to come.

 

But there is a more immediate issue, which will be of primary interest to the financial markets. Will the European Central Bank (ECB) judge that enough has been agreed in Brussels to allow the ECB to do any more to help protect countries which are struggling to pay their debts?

 

That will not mean becoming a lender of last resort - a commitment to the unlimited buying of bonds. But the ECB could still do more, if it chose, to help bring down the cost of borrowing for countries like Italy and Spain.

 

Sovereign debt woes in several member states are still at the heart of this crisis, and if further action is not taken to resolve them, there may not be much of a eurozone left to haggle over.

 

Euro deal means less sovereignty

 

Instead, eurozone members and others will adopt an accord with penalties for breaking deficit rules. It will be backed by a treaty between governments, not an EU treaty.

 

"In fact, 26 leaders are in favour of joining this effort. They recognise the euro is a common good," said European Council President Herman Van Rompuy.

 

Mr Cameron said he had done "the right thing" by not signing up to the deal, as it was not in Britain's interests.

 

"We were offered a treaty that didn't have proper safeguards for Britain, and I decided it was not right to sign that treaty," he told the BBC.

 

"We're still in the single market. That is the best safeguard of keeping markets open," he said.

 

German Chancellor Angela Merkel said the UK was the only country to have expressed reservations, but that Mr Cameron had recognised that a stable euro was in Britain's interest.

 

Of the nine other EU countries outside the euro, Hungary, the Czech Republic and Sweden have said they must consult their parliaments. Six others - including Denmark, Poland and Latvia - have agreed to join the new deal.

 

However, some countries - such as the Republic of Ireland, which is in the eurozone - have a constitutional requirement to hold a referendum on any major transfer of powers to the EU.

 

The Irish Minister for European Affairs, Lucinda Creighton, told the Reuters news agency the probability of a referendum was "50-50 and we will be looking at the detail over the next couple of weeks".

 

EU leaders aim to have the pact - known as a "fiscal compact" - ready to take effect by March.

 

Its main provisions include:

 

a cap of 0.5% of GDP on countries' annual structural deficits

 

"automatic consequences" for countries whose public deficit exceeds 3% of GDP

 

the tighter rules to be enshrined in countries' constitutions

 

the EU's permanent bailout facility, the European Stability Mechanism (ESM), to be accelerated and brought into force in July 2012

 

the adequacy of 500bn-euro (£427bn; $666bn) limit for the ESM to be reassessed

 

eurozone and other EU countries to provide up to 200bn euros to the International Monetary Fund (IMF) to help debt-stricken eurozone members

 

Continue reading the main story Euro agreement - from the papersThe Guardian says Britain is "facing isolation in Europe" after David Cameron vetoed a revision of the Lisbon treaty.

 

In the Economist, the Charlemagne's notebook blog describes the agreement - and Britain's non-participation - as Europe's "great divorce".

 

The Financial Times says EU leaders are "struggling to cope" with what it describes as "a profound split".

 

The New York Times describes the agreement as "not a perfect solution," because it could be seen as institutionalizing a two-speed Europe - but it says the pact could be ratified much more quickly than a full treaty amendment.