9 Dec 2011

Saving the euro – anatomy of a deal

“Deal to save euro – Britain isolated as usual” – that’s how France and Germany want the Brussels summit reported. Channel 4 News looks at what has been agreed.

'Deal agreed to save euro - Britain isolated as usual' - that is how France and Germany want the Brussels summit reported. Channel 4 News looks at what was agreed (Reuters)

They had 10 days to save the euro, according to EU economic and monetary affairs commissioner Olli Rehn. That was what he said 10 days ago – but whether the last-ditch summit in Brussels on Thursday did everything that was needed is another question.

If eurozone leaders were hoping to appease the markets, the initial signs are not encouraging: Italian borrowing costs have returned to near unsustainable levels and the euro fell in Asia. Earlier, when asked if the euro was now safe, Polish Prime Minister Donald Tusk said: “I’m not sure.”

Early days, of course, but France and Germany are praying they are close to finding a solution to Europe’s debt woes, despite David Cameron’s resistance to signing a new EU treaty deal.

‘Fiscal compact’

The “Merkozy” vision for the single currency adds a so-called “fiscal compact” to monetary union that is designed to stop eurozone countries from borrowing too much.

In future, these states will have to ensure that budget deficits – the difference between what they spend and raise in taxes – remain within 3 per cent of gross domestic product (GDP), with automatic sanctions for those breaking this golden rule.

There is nothing new about this 3 per cent limit. It is in the 1992 Maastricht Treaty and the 1997 stability and growth pact. Sanctions are available at the moment, but have never been imposed.

France and Germany

Just as well for France and Germany. As Channel 4 News has already revealed, both countries have flouted this rule on numerous occasions. The implication now is that this time they really mean business.

Herman Van Rompuy, president of the European Council, said: “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.”

President of the European Central Bank (ECB), Mario Draghi said: “It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members.”

Read more: What does the EU veto mean for the UK?


In the run-up to the summit, Mr Draghi’s use of the term “fiscal compact” had raised hopes that the ECB would come to the rescue of indebted member states by buying more of their bonds.

Despite German opposition, France, backed by Britain, has long argued that the ECB should play a bigger role in stabilising the eurozone’s finances, but Mr Draghi’s words were misinterpreted. The ECB will support banks in financial difficulties; it will not increase its aid to governments.

Bailout fund

Alongside this “fiscal compact”, there was an agreement to bring forward to July 2012 the establishment of the European Stability Mechanism (ESM), a permanent bailout fund for indebted countries unable to finance their borrowing on the bond markets. Eurozone countries will also consider lending up to 200bn euros to the International Monetary Fund.

The ESM, which will replace the 440bn euro European Financial Stability Facility, will be capped at 500bn euros, less than predicted before the summit.

It will not be able to behave like a bank, borrowing money from the ECB, which would have given it formidable strength. This was something proposed by Mr Van Rompuy, supported by France, but opposed by Germany.

One of the arguments against is that it would break EU law, which prohibits the ECB from financing government deficits.