When the official talks finished, the President of the European Council Herman Van Rompuy announced that the UK is the only EU country which will not take part in drafting the new rules on fiscal discipline.
British PM David Cameron said it was a tough decision, but a right one, because the treaty was not to UK's best interests. He expressed his hope however, that the Eurozone manages to solve its problems: "We want the euro-zone countries to come together and solve their problems, but we should only allow that to happen inside the European Union treaties if there are proper protections for the single market and for other key British interests."
European Commission President Jose Manuel Barroso regretted after the meeting that an agreement including all EU nations was not reached: “We would have preferred a unanimous agreement. This was not possible.” He also added that “the only alternative was to do it via an inter-governmental treaty, but that doesn’t mean that EU institutions won’t have a role.”
Herman Van Rompuy also confirmed that EU countries will provide the IMF with 200 billion euros, although he did not specify how will these resources be used exactly and said that EFSF firepower will be boosted as soon as possible, with the aim of activating it by July 2012. The President of the European Council added that the issue of eurobonds remained unsolved, but works on the matter will be continued.
EU leaders fail to change Treaty after first day of talks
The EU officials gathered in Brussels for the last summit of the year, considered to be crucial for the future of the euro, have concluded their first day of negotiations at five in the morning on Friday, after ten hours of talks. European leaders managed to agree on a fiscal pact which will increase budget discipline in the area, but failed to introduce the changes to the Treaty.
The EU politicians reached an agreement on making anti-deficit rules stricter, in hope of convincing the ECB to accelerate its rescue operations, after Mario Draghi emphasized at a press conference following the central bank's interest rate decision on Thursday, that it would not step in to help out the struggling EU government bond markets. The so-called 'fiscal compact' includes sanctions for countries breaching limits of deficit and public debt.
European Council President Herman Van Rompuy, who also chairs the summit, explained the decision during a press conference at the end of the meeting: “"It means reinforcing our rules on excessive deficit procedures by making them more automatic. It also means that member states would have to submit their draft budgetary plans to the (European) Commission,"
Meanwhile ECB President Mario Draghi expressed his satisfaction with the decision: “It’s a very good outcome for euro-area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro-area countries.”
The “fiscal compact” will be implemented by the 17 Eurozone countries and 6 other members of the European Union. The deal could not be sealed by all 27 EU countries due to the fact that the British PM David Cameron presented demands which Germany and France were not willing to fulfill – a right for the UK to veto EU laws concerning financial market services. Also the Czech Republic, Hungary and Sweden refused to join the “fiscal compact.”
Other issues discussed during the meeting was the possibility EU central banks lending €200 billion euros (150 billion euros from the Eurozone) to the IMF which the institution could in turn use to strengthen the crumbling bond markets.
"We can be very pleased at the result," said IMF Managing Director Christine Lagarde leaving the summit.
EU officials decided as well to limit the permanent bailout fund, the European Stability Mechanism, at 500 billion euros, and excluded the possibility of granting it a banking license, as it was previously suggested by Herman Van Rompuy.
Paul Donovan form UBS seems to be skeptical about the decisions taken at the summit so far, which he considers a flash in the pan: “The IMF may get a loan of 200 billion euro. The ECB will administer the EFSF and ESM bailout mechanisms. Does this solve the crisis? Imposing a pro cyclical fiscal policy on a pro cyclical exchange rate and monetary policy without tackling competitiveness issues does not solve the larger crisis, no. It may buy time.”
The statement by the Euro area head of state was released afterward.
ECB adopts more unconventional measures to fight the crisis
After the ECB's decision to reduce the interest rate by 25 basis points to 1% in December, the central bank's President Mario Draghi held a monthly press conference to comment on the considerations underlying this move and announce steps which the institution will take, in order to contain the EU debt crisis.The first of the new measures introduced by the ECB are two non-standard operations which offer unlimited 36-month credit for banks in the Eurozone, with an option of early repayment after one year. The second is an increase of collateral availability of ECB loans by means of reducing the rating threshold for certain asset-backed securities (ABS). The third measure concerns a decrease of the reserve requirement for commercial banks from 2% to 1%, which is supposed to free up collateral and support money market activity.
Following the ECB meeting Draghi told the reporters that the above-mentioned steps taken by ECB “should ensure enhanced access of the banking sector to liquidity.”
Apart from presenting the new measures, Mario Draghi firmly rejected the possibility of the ECB
purchasing unlimited amounts of bonds of the most indebted EU countries as well as lending money to the IMF in order to evade EU regulations, according to which central banks cannot finance Eurozone governments.
Jamie Coleman from Forex Live comments on the ECB's unexpected decision: “The market came to the very logical conclusion after Mr. Draghi testified before the EU Parliament last week that if the EU did its part to get its fiscal house in order the ECB would do its part from a financial perspective. Perhaps we read too much into the comments, but they seemed quite straight forward. makes you wonder why the Germanic shift in the last week. Some would say "they" got to him, they being the Germans...We may never know... What we do know is that the ECB will be part of a quick-fix for the euro zone making any recovery that much more difficult.”
In hindsight, UBS FX strategist Geoffrey Yugiven commented: "There were no signs of any breakthroughs ahead of the European Union summit, the ECB was always going to keep its strongest cards close to its chest and not risk its own credibility. If they acted according to the market's wishes, the incentives for governments to act would almost evaporate and the central bank was not going to let that happen."
