Europe, led by its economic powerhouses France and Germany, agreed to a historic new fiscal and financial stability pact after 10 hours of overnight talks, ending Friday morning. But a potentially profound division opened up as Britain stood virtually alone in opposing the move, citing the interests of the nation and its pre-eminent financial services sector.
The so-called fiscal compact, which will require countries to sign a renegotiated treaty, will force member-countries to agree tough new measures for ‘balanced budgets’ aimed at preventing recurrence of the sort of crisis that has enveloped the 17-member euro zone group.
These ‘balanced budgets’ will have structural deficits no greater than 0.5% of gross domestic product.
There will be automatic penalties for any country whose deficit exceeds 3% of GDP. Governments will have to submit their national budgets to the European Commission, which will have the power to request changes.
But Britain, which is not a member of the euro zone and is suspicious of Franco-German proposals for introducing a financial transactions tax — the so-called Tobin Tax —opted out after face-to-face negotiations in Brussels from which officials were excluded.
The City of London accounts for 10% of Britain’s GDP, and one in every six pounds raised in taxes comes from the British financial services sector. It employs 1.3 million people and is seen as crucial to attempts to avoid a double-dip recession.
The deal is by no means done and dusted. Those among the European Union’s 27 member-states that do agree to the pact will now have to present it to their parliaments – and the approval of Eurosceptic MPs cannot be taken for granted.There is also a lack of clarity on how exactly the accord will be implemented.