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EU
leaders agreed Friday a new "golden rule" to bring down debt, as
battles over treaty change and hard cash overshadowed a crunch summit
hit by an ECB warning it will not jump-start rescue funding.
The
move to ask countries to set "balanced" budgets until debt levels drop
was only agreed "in principle", despite proposed "automatic
consequences" for eurozone countries that break the long-ignored rule
that budget deficits must be under three percent of gross domestic
product (GDP).
Countries' "annual structural deficit" could reach 0.5 percent of GDP, rather than zero, draft conclusions seen by AFP said.
The "structural" deficit is one calculated minus one-off factors such as debt repayments and the effects of the economic cycle.
However,
several sticking points in the wider "fiscal compact", the first steps
towards a tax-and-spend union, remained according to diplomats over the
finer detail of agreeing the legal language required.
Difficult
talks running overnight began on a sour note when European Central Bank
president Mario Draghi, who joined pre-summit negotiations with a
restricted power group of Germany, France and leading EU officials, sent
stock markets falling.
Draghi said hoped-for ECB action to buy up the sovereign bonds of debt-wracked countries was "limited" and "temporary".
Over the past two years, bond traders have driven up borrowing costs for a succession of eurozone countries.
Markets
have been looking to see how European Union leaders would come up with a
promised trillion-euro emergency firewall to save Italy or Spain if
they became sucked in like Greece and others beforehand.
The euro
dropped against the dollar and Italian stocks fell a steep 4.29 percent
while in the United States the Dow Jones also shed 1.63 percent.
"We
want them to produce results that relieve markets and the world as it
is a very important meeting that could determine the course of the world
economy in 2012," Japan's Finance Minister Jun Azumi said after stocks
there also opened lower.
Diplomats said they expected the arduous
negotiations to run through the night as five of 27 EU states, including
Britain, came out strongly against a German-French drive for changes to
the European Union treaty.
Chancellor Angela Merkel and President
Nicolas Sarkozy, who earlier warned there might be "no second chance"
for a deal on the euro, have argued full-blown treaty change is the way
to reassure markets that eurozone governments will in future live within
their means.
US President Barack Obama questioned whether
Europe's leaders can collectively "muster the political will" to solve a
crisis that Russian counterpart Dmitry Medvedev also said risked
hurting the global economy.
Even Pope Benedict XVI said a prayer for the EU.
Earlier,
the ECB cut interest rates for a second time and eased further access
and repayment conditions for bank funding, on the day the European
Banking Authority (EBA) in London increased banks' estimated needs under
a recapitalisation drive.
Europe's banks must raise 114.7 billion euros ($152.5 billion) in new capital to restore stability and confidence, the EBA said.
Draghi,
though, said a plan for national central banks to fund the IMF, which
sources said could inject up to 200 billion euros into bailout funding
for Italy or Spain if required, would raise "complex legal issues".
He was adamant that the ECB must not be used simply to print money.
British
Prime Minister David Cameron vowed he would "have no hesitation in
vetoing a treaty at 27" after stressing that powers cannot pass from
London to Brussels without a referendum.
Britain wants the EU to
ease off on tough new regulation on the City of London financial sector
and a proposed tax on financial transactions.
Triple A-rated
eurozone country Finland, as well as non-euro Poland, Sweden and Romania
also had issues over full-blown treaty change.
The summit faces
other obstacles, with diplomats saying that Merkel rejected entirely
proposals for the eurozone's current and future rescue funds to be added
together so as to make available resources bigger.
Berlin also
ruled out granting the European Financial Stability Facility (EFSF) a
banking licence, allowing it to draw funds from the ECB.
IMF chief
Christine Lagarde pledged that her institution would "participate" in
the eurozone's efforts and called for "decisive" and "coordinated"
action.
The pressure is on after ratings agency Standard &
Poor's put a number of large European banks on review and placed the EU
and the eurozone on watch for downgrades.
Enlarge PhotoBritish Prime Minister David Cameron arrives for an informal dinner of European Union …
Enlarge PhotoFrance's President Nicolas Sarkozy (C) sits next to German Chancellor Angela Merkel …
EU
leaders agreed Friday a new "golden rule" to bring down debt, as
battles over treaty change and hard cash overshadowed a crunch summit
hit by an ECB warning it will not jump-start rescue funding.
The
move to ask countries to set "balanced" budgets until debt levels drop
was only agreed "in principle", despite proposed "automatic
consequences" for eurozone countries that break the long-ignored rule
that budget deficits must be under three percent of gross domestic
product (GDP).
Countries' "annual structural deficit" could reach 0.5 percent of GDP, rather than zero, draft conclusions seen by AFP said.
The "structural" deficit is one calculated minus one-off factors such as debt repayments and the effects of the economic cycle.
However,
several sticking points in the wider "fiscal compact", the first steps
towards a tax-and-spend union, remained according to diplomats over the
finer detail of agreeing the legal language required.
Difficult
talks running overnight began on a sour note when European Central Bank
president Mario Draghi, who joined pre-summit negotiations with a
restricted power group of Germany, France and leading EU officials, sent
stock markets falling.
Draghi said hoped-for ECB action to buy up the sovereign bonds of debt-wracked countries was "limited" and "temporary".
Over the past two years, bond traders have driven up borrowing costs for a succession of eurozone countries.
Markets
have been looking to see how European Union leaders would come up with a
promised trillion-euro emergency firewall to save Italy or Spain if
they became sucked in like Greece and others beforehand.
The euro
dropped against the dollar and Italian stocks fell a steep 4.29 percent
while in the United States the Dow Jones also shed 1.63 percent.
"We
want them to produce results that relieve markets and the world as it
is a very important meeting that could determine the course of the world
economy in 2012," Japan's Finance Minister Jun Azumi said after stocks
there also opened lower.
Diplomats said they expected the arduous
negotiations to run through the night as five of 27 EU states, including
Britain, came out strongly against a German-French drive for changes to
the European Union treaty.
Chancellor Angela Merkel and President
Nicolas Sarkozy, who earlier warned there might be "no second chance"
for a deal on the euro, have argued full-blown treaty change is the way
to reassure markets that eurozone governments will in future live within
their means.
US President Barack Obama questioned whether
Europe's leaders can collectively "muster the political will" to solve a
crisis that Russian counterpart Dmitry Medvedev also said risked
hurting the global economy.
Even Pope Benedict XVI said a prayer for the EU.
Earlier,
the ECB cut interest rates for a second time and eased further access
and repayment conditions for bank funding, on the day the European
Banking Authority (EBA) in London increased banks' estimated needs under
a recapitalisation drive.
Europe's banks must raise 114.7 billion euros ($152.5 billion) in new capital to restore stability and confidence, the EBA said.
Draghi,
though, said a plan for national central banks to fund the IMF, which
sources said could inject up to 200 billion euros into bailout funding
for Italy or Spain if required, would raise "complex legal issues".
He was adamant that the ECB must not be used simply to print money.
British
Prime Minister David Cameron vowed he would "have no hesitation in
vetoing a treaty at 27" after stressing that powers cannot pass from
London to Brussels without a referendum.
Britain wants the EU to
ease off on tough new regulation on the City of London financial sector
and a proposed tax on financial transactions.
Triple A-rated
eurozone country Finland, as well as non-euro Poland, Sweden and Romania
also had issues over full-blown treaty change.
The summit faces
other obstacles, with diplomats saying that Merkel rejected entirely
proposals for the eurozone's current and future rescue funds to be added
together so as to make available resources bigger.
Berlin also
ruled out granting the European Financial Stability Facility (EFSF) a
banking licence, allowing it to draw funds from the ECB.
IMF chief
Christine Lagarde pledged that her institution would "participate" in
the eurozone's efforts and called for "decisive" and "coordinated"
action.
The pressure is on after ratings agency Standard &
Poor's put a number of large European banks on review and placed the EU
and the eurozone on watch for downgrades.