Europe Agrees to Fiscal Compact

Twenty-five out of 27 states in the European Union agreed to Germany’s “fiscal compact” on Monday, with only Britain and the Czech Republic refusing to sign the pact for stricter budget discipline.

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The fiscal compact will impose quasi-automatic sanctions on countries that breach budget deficit limits and enshrine balanced budget rules in national law.

The official purpose of yesterday’s summit in Brussels was to develop strategies to revive growth and create jobs, but differences over the limits of austerity and Greece’s unfinished debt restructuring negotiations hampered efforts to convey a more optimistic message about Europe’s handling of the debt crisis.

The European Central Bank welcomed the accord after having long pressed euro-zone governments to put their houses in order. “It is the first step toward a fiscal union. It certainly will strengthen confidence in the euro area,” said ECB President Mario Draghi.

German Chancellor Angela Merkel told a news conference the agreements on the fiscal pact and a permanent rescue fund for the euro zone were a “small but fine step on the path to restoring confidence.”

French President Nicolas Sarkozy said he expects Greece to reach a restructuring deal with private creditors within days, and that independent European institutions — a likely reference to the ECB — will help meet a funding gap.

Greek Prime Minister Lucas Papademos echoed Sarkozy’s sentiments, saying he hoped to reach a deal both on restructuring 200 billion euros of debt and on conditions tied to a second bailout by the troika by the end of the week.

Greece’s lenders — the EU, ECB, and International Monetary Fund — cannot release a second, 130 billion-euro rescue program for Athens until there is a deal. Greece needs the bailout money to meet a 14.5 billion-euro bond payment due on March 20. Without it, Athens will default.

EU leaders also agreed that the 500 billion-euro European Stability Mechanism will enter force in July, a year earlier than planned. Though Europe is under pressure from the U.S., China, the IMF, and some of its own members to increase the size of the financial firewall, Merkel has refused to consider such an issue until March.

The ESM was meant to replace the temporary European Financial Stability Facility, but pressure is now mounting to combine the two funds to create a 750 billion-euro firewall. The IMF believes that if Europe puts more of its own money into the fund, it will convince others to give more resources to the IMF that can be used to fight the crisis as well.

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