EU leaders agree on fiscal pact, ECB douses hopes

Thu Dec 8, 2011 6:28pm EST
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By Luke Baker and Julien Toyer

BRUSSELS (Reuters) - European Union leaders agreed on new fiscal rules enshrining tougher budget discipline on Thursday, an EU official said, after the European Central Bank doused hopes of dramatic action on its part to arrest the euro area's debt crisis.

The 27 EU leaders, meeting in Brussels, agreed on automatic sanctions for euro zone deficit offenders unless three-quarters of states vote against the move, and approved a new fiscal rule on balanced budgets to be written into national constitutions.

"There is a deal between leaders on the new fiscal compact," an EU official told reporters after four hours of talks.

However, they were still debating how to strengthen their future permanent rescue fund and whether to give it a banking license, and had not yet broached the vexed question of whether the new pact requires major changes to the EU treaty.

European Council President Herman Van Rompuy, the summit chairman, wants all 27 EU states to agree to the rule changes via a minor adjustment to a treaty protocol that could be implemented quickly without requiring full ratification. But German Chancellor Angela Merkel demanded a fully fledged treaty change to give the measures extra weight.

"The Germans are obsessed with how we are going to do things, saying we have to change the treaty. They are totally obsessed. That's why it can get difficult," an EU diplomat said.

ECB President Mario Draghi earlier spooked financial markets by discouraging expectations that the bank would massively step up buying of government bonds if EU leaders agreed on moves towards closer fiscal union.

As soon as the draft summit agreement leaked, a senior German official rejected key measures including letting the future rescue fund, the European Stability Mechanism, operate as a bank, borrowing from the ECB, and a long-term goal of issuing common euro zone bonds.   Continued...