German Chancellor Angela Merkel cemented her political ascendancy in Europe on Monday when 25 out of 27 EU states agreed to a German-inspired pact for stricter budget discipline, even as they struggled to rekindle growth from the ashes of austerity.
Only the UK and the Czech Republic refused to sign a fiscal compact in March that will impose quasi-automatic sanctions on countries that breach EU budget deficit limits and will enshrine balanced budget rules in national law.
The accord was eagerly greeted by the European Central Bank (ECB), which has long pressed eurozone governments to put their houses in order.
“It is the first step towards a fiscal union. It certainly will strengthen confidence in the euro area,” ECB President Mario Draghi said.
Officially, the half-day summit focused on a strategy to revive growth and create jobs at a time when governments across Europe are having to cut public spending and raise taxes to tackle mountains of debt. However, differences over the limits of austerity and Greece’s unfinished debt restructuring negotiations hampered efforts to convey a more optimistic message that Europe is getting on top of its debt crisis.
Merkel told a news conference that the agreements on the fiscal pact and a permanent rescue fund for the eurozone were a “small, but fine step on the path to restoring confidence.”
French President Nicolas Sarkozy said he expected a deal on reducing Greece’s debt to private bondholders within days and he believed independent European institutions — a clear reference to the ECB — would help meet a funding gap.
Greek Prime Minister Lucas Papademos said he hoped to reach a deal both with private creditors over restructuring 200 billion euros (US$263.6 billion) of debt and on conditions tied to a second bailout by its international lenders by the end of the week.
“Significant progress has been made in talks about private sector involvement. We are seeking to conclude negotiations with the troika by the end of the week,” Papademos said after he and his finance minister met the heads of EU institutions.
Until there is a deal, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally pledged at a summit in October last year. Without it, Athens faces default next month when huge bond repayments fall due.
The EU leaders also agreed that a 500 billion euro European stability mechanism would enter into force in July, a year earlier than planned, to back heavily indebted states.
Many economists doubt the wisdom of so severely restricting deficit spending and EU diplomats say the fiscal compact was mostly a political gesture to calm German voters — angry at repeated eurozone bailouts — and to restore market confidence.
“To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do,” a British official said.
There was no repetition of last month’s confrontation between British Prime Minister David Cameron and Sarkozy, when Cameron vetoed efforts to amend the EU treaty to tighten eurozone budget discipline.
Merkel said that although Cameron had shown no sign of relenting in his opposition to treaty change, the new pact could be easily slotted into EU law at a later date and she expected it would be within five years.