Fear of a Two-Speed Europe Britain Vetoes Changes to EU Treaties

At marathon talks in Brussels, European leaders failed to reach agreement on changes to the EU treaties to help solve the debt crisis after Britain opposed the plans. The 17 euro-zone members and six other states will now go ahead with their own pact, prompting fears of a split in the bloc. 
Britain's Prime Minister David Cameron leaves the European Council headquarters on Friday morning after a night of negotiations.

Britain's Prime Minister David Cameron leaves the European Council headquarters on Friday morning after a night of negotiations.


Germany and France have failed in their bid to amend the European Union treaties with the support of all 27 EU member states after the United Kingdom refused to get on board. Observers are warning of a split in the EU as a result.

The 17 euro-zone members and six other non-euro countries -- Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania -- are now going to push ahead with a separate pact, French President Nicolas Sarkozy announced on Friday morning, following long talks in Brussels at the highly anticipated European Council summit.  The pact would impose stricter budgetary discipline on countries in a bid to bring the crisis under control.


Photo Gallery: Europe's Leaders to the Rescue


In addition to Britain, Hungary said it would not support a change in the EU treaties, while Sweden and the Czech Republic will consult their parliaments before deciding if they want to be involved, Sarkozy said.

"It was not possible to get unanimity," European Commission President Jose Manuel Barroso said following hours of negotiations among the leaders. "It was the proper decision to go ahead at least with those ready to commit immediately," he added.

"We would have preferred a reform of the treaties among 27. That wasn't possible given the position of our British friends," Sarkozy said. He sharply criticized the conditions that Britain had wanted to impose in return for its consent, calling them "unacceptable." British Prime Minister David Cameron had insisted on provisions allowing Britain to opt out of a proposed tax on financial services, which would significantly impact London as a financial services center.

Cameron justified his opposition to an amendment to the EU treaties as a "tough but good" decision. "Where we can't be given safeguards, it is better to be on the outside," he said after the talks.


Photo Gallery: British Press Reacts to Cameron's Veto

In the run-up to the summit, the British prime minister had already strongly criticized demands by Germany and France to modify the EU treaties in order to strengthen budgetary discipline. Berlin and Paris had insisted on an amendment to create legally binding rules to protect the euro, such as statutory debt limits for euro-zone member states or tougher action against countries that violate the deficit rules. During the negotiations, Britain had wanted a veto on any EU decisions that involved financial market regulation, a condition that Germany and France opposed.

Now, only 23 of the 27 EU members will commit themselves to much greater fiscal discipline and tougher controls. Sarkozy said that the new pact should be sealed by March. European leaders will continue discussing the details of the pact on Friday.

Host of Legal Difficulties

An intergovernmental treaty between the 17 euro-zone countries and six other EU countries could be put into action more quickly than an amendment to the EU treaties, European Council President Herman Van Rompuy said after the failed negotiations. He said that speed was necessary in order to increase credibility, and that it was not impossible that the EU treaties would be revised later.

Experts warn, however, that a new agreement between 23 EU member states could lead to a host of legal difficulties , pointing out that the regulations must not contradict the existing EU treaties. Cameron called into question whether the proposed new fiscal union would be allowed to use EU institutions, insisting that the European institutions would continue to work for all 27 member states.

On Friday morning, Chancellor Angela Merkel and European Central Bank President Mario Draghi said the EU summit's decisions were very important steps toward stabilizing the euro zone. "We will create a new fiscal union which is also a stability union," Merkel said, adding that it would include a debt brake and automatic sanctions for countries that break the budget rules. Draghi said it was a "very good outcome for the euro area."

The markets were less convinced, however. The immediate reaction was lukewarm. The Stoxx 50 index of leading European shares fell by 0.5 percent after opening but later bounced back. The value of the euro against the dollar initially fell by 0.4 percent before recovering, trading at around $1.33. Observers said that markets could be worried about the prospect of a split in the EU, following the failure to get unanimous support for stricter budgetary rules. The new pact would appear to be cementing a "two-speed" Europe.

No More Involvement of Private Creditors

EU leaders also agreed on additional steps to fight the sovereign debt crisis, including getting the International Monetary Fund more closely involved in efforts to tackle the crisis. European Council President Van Rompuy, who heads the powerful body representing the interest of the 27 member states within the EU, announced that the euro-zone countries and other member states would make up to €200 billion ($266 billion) available to the fund. The money would be provided by the central banks of EU member states. The IMF would then use the funds to provide aid to crisis-stricken countries. Diplomats close to the negotiations said the idea had been discussed that euro-zone central banks would provide around €150 billion and the central banks of the other 10 EU members would come up with the remaining €50 billion.

The EU countries also want to move forward the launch of the European Stability Mechanism (ESM), the permanent euro backstop fund. It will now be made operational by July 2012 and will replace the current rescue fund, the EFSF, after a transitional phase.

The ESM will not, however, have access to loans from the European Central Bank (ECB), which would have increased the funds it had available to tackle the debt crisis. Some countries had called for the ESM to be granted a banking license, but Germany opposed such a move.

Van Rompuy also announced a key decision regarding the involvement of the private sector in national bankruptcies. In the future, private creditors such as banks will no longer have to share losses resulting from a haircut on debt issued by ailing euro-zone countries. The decision marks a departure from the EU's previous strategy, which had been widely criticized for unsettling financial markets. In the case of Greece, private creditors had been forced to agree to write down 50 percent of their holdings of Greek sovereign bonds.

Van Rompuy acknowledged that the EU's previous approach had been flawed. The policy had had "a very negative effect on the debt markets" and was now "officially over," he said.

dgs - with wire reports