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Europe's new fiscal union: how big a step out of crisis?

Angela Merkel and Nicolas Sarkozy have proposed a pact to form a European 'fiscal union' with strict financial rules in parallel with the EU. But Britain has balked, leaving it the odd man out.

By Correspondent / December 9, 2011

French President Nicolas Sarkozy (l.) walks by British Prime Minister David Cameron (c.) during a round table meeting at an EU summit in Brussels on Dec. 9.

Geert Vanden Wijngaert/AP

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Berlin

Politicians are praising it as a success, while economic experts see it with skepticism.  Either way, the latest European Union emergency summit in Brussels has agreed on a plan to fight the union’s sovereign debt crisis through further integration of the eurozone. But the proposal – drafted by Germany and France – appears to have done so at the cost of widening the rift between continental Europe and Britain.

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After a night-long discussion, 26 of the 27 European leaders agreed to pursue what German Chancellor Angela Merkel and French President Nicolas Sarkozy call a fiscal union – a group of states within the EU which adheres to stricter budget rules and accepts sanctions if these rules are broken.

“What we have achieved tonight is a tremendous step towards a stable Europe,” Mrs. Merkel told journalists in Brussels on Friday. “This summit will go down in history,” President Sarkozy said.

The Franco-German plan was originally to change the Lisbon Treaty, the basic legal framework that governs the EU, making the amendments binding for all 27 members. But the UK refused to back the move on the grounds that it did not get an exemption from a planned financial-transaction tax. Britain's financial services sector accounts for about 10 percent of the country's economy.

To circumvent the British veto, France and Germany instead proposed a new treaty, in parallel with the EU treaty, to implement the proposed changes. Most of the current EU signatories agreed to the proposal. A number of countries like Sweden, Hungary, and the Czech Republic initially said they would first have to get parliamentary approval for the new proposal, but late announced they were prepared to sign the agreement, leaving Britain as the odd one out.

Many European economists were less enthusiastic about the plan than Merkel and Sarkozy. “Europe has moved a step toward solving the crisis,” says Ferdinand Fichtner of the German Institute of Economic Research in Berlin. “Stronger fiscal coordination is an important pillar for a stable currency union. But it does not address the main problem of struggling economies in southern Europe: lack of growth.”

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