European Union seals fiscal treaty to save euro

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. Dipankar De Sarkar reports. Till debt almost did us apart

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.