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Europe pact: Members must balance budgets or suffer sanctions

European leaders signed a fiscal pact that would enforce balanced budget among member states. Leaders also pledged to promote growth. Members must still ratify the pact.

By Correspondent / January 31, 2012

Germany's Chancellor Angela Merkel meets with France's President Nicolas Sarkozy (c.) and Italy's Prime Minister Mario Monti (l.) shortly before an informal meeting of the European Council ahead of the European Union leaders summit in Brussels on Monday.

Jesco Denzel/Bundesregierung/Reuters



The fiscal pact signed by Europe’s leaders Monday aims to enforce budget discipline through the threat of automatic sanctions on countries that breach deficit limits and do not present a balanced budget by prescribed deadlines.

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But leaders also pledged to promote growth and target high unemployment, in a sign that the relentless focus on austerity measures alone to battle Europe's economic woes is wearing thin.

Critics have argued for some time that the EU’s tough austerity drive was undermining countries struggling to gain the economic momentum that will win the confidence of financial markets, and was actually driving these countries into a recession.

“Austerity needs to come in very carefully administered doses, otherwise you kill demand,” says Holger Schmieding, chief economist with Berenberg Bank in London. “At the same time you need to reform the labor market, make it easier for people to find jobs and easier for businesses to start."

In a joint statement on economic growth after the summit, EU leaders acknowledged that cutting budgets was “not in itself sufficient.” The European Union will dedicate €82 billion ($107 billion) to fighting unemployment, Herman Van Rompuy, the EU president announced. The money will come out of so-called structural funds, which were set up to subsidize economically weak regions in the union.
German Chancellor Angela Merkel called the treaty “an important step forward in Europe’s efforts to overcome the sovereign debt crisis." Britain and the Czech Republic refused to sign the pact, which still needs ratification in the other 25 EU member states. Most member states are likely to ratify, though Ireland may threaten to hold a referendum on it, while in France, presidential elections could affect French participation. The UK government has in the past made it clear that it was not prepared to yield any budgetary control to Brussels.
The accord was an initiative by Chancellor Merkel. But Germany is seen by many as one of the main culprits for the lack of progress in solving the debt crisis. Europe’s biggest economy and the main contributor to bailout packages and rescue funds, Germany has been trying to implement a strict therapy of cutting deficits throughout the eurozone, where a range of countries including Greece, Portugal, Spain, and Italy have amassed critically high levels of sovereign debt and at the same time lost the trust of international investors because of weak economic performance.
Leaders in Brussels appeared to agree that more should be done to promote growth throughout Europe and to facilitate the movement of labor. “If we just keep cutting back on spending, our children won’t inherit a house, they’ll just inherit a mortgage,” said Martin Schulz, president of the European Parliament.


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