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Britain’s rejection of EU treaty lays bare widening rift it has with its neighbors

By Henry Chu, Los Angeles Times

LONDON — By agreeing to knit their nations closer together on fiscal and economic policy, Europe’s leaders are writing a potentially momentous new chapter in the continent’s drive toward political integration.

But at the end of a two-day summit in Brussels on Friday, it was unclear whether the enforced austerity demanded by France and Germany would help revive Europe’s weakest economies, or condemn them to a cycle of deepening recession.

And the chorus of “oui,” “ja” and “si” at the summit was punctuated by a resounding “no” from Britain, laying bare the widening rift between one of the region’s biggest players and its neighbors on the European mainland. Britain’s exclusion called into question not just its role in the EU, but the nature of the 27-country union as it charts a new path.

The immediate aim of the summit was to produce a plan for collective fiscal discipline in the 17 nations that use the euro currency, a bid to put it on sounder footing and prevent debt crises like the one now threatening its survival.

All of the eurozone countries signed up early Friday to a proposal by Germany and France to accept strict limits on government spending and borrowing, with those that violate the rules subject to sanction. Of the 10 EU countries that do not use the common currency, six decided to opt in, as well. Leaders of Hungary, Sweden and the Czech Republic said they were open to joining after more deliberation at home.

That left Britain, whose attitude toward the EU has always been prickly, as the lone country to categorically refuse on the grounds that its national interests would be compromised, particularly the primacy of London’s financial-services sector.

Under the new deal, governments will submit their budgets for review by a higher European authority, to ensure that public deficits do not exceed 3 percent of gross domestic product and debt does not rise above 60 percent of GDP.

The requirement entails a significant surrender of sovereignty; imagine Congress agreeing to give some North American entity the power to rule on the suitability of the U.S. budget (and that of Mexico and Canada as well).

In Europe, such a change would represent a big step toward fiscal union, a convergence that would scarcely have seemed on the horizon just a year ago. Officials say it would help prevent the kind of debt crisis that erupted in Greece two years ago and that is now engulfing bigger eurozone economies.

The most influential voice in crafting the new policy has been that of Europe’s economic powerhouse and model of fiscal discipline, Germany.

“I have always said the 17 states of the euro group have to regain credibility,” said German Chancellor Angela Merkel. “I have achieved what I wanted to achieve.”

The formal treaty enshrining the changes is to be crafted by March. The question is whether the new approach will reassure investors who have driven borrowing costs for countries such as Spain and Italy to almost unsustainable levels.

It also remains unclear whether the European Central Bank will intervene forcefully now to buy the bonds of debt-ridden countries to help keep them afloat. Investors appeared to reserve judgment, boosting stock markets in Europe on the back of Friday’s deal but tempering that rise by nudging up interest rates on Italian and Spanish bonds.

And experts said that the pact fails to address the lack of growth in Europe’s weakest economies. Major spending cuts demanded of countries such as Greece, Portugal and Ireland — all of which have accepted international bailouts — have only led to economic contraction, analysts say.

“This is not primarily a fiscal crisis. It’s basically a growth crisis, and there’s nothing in this agreement that makes one any more optimistic about economic growth,” said Simon Tilford, chief economist at the Center for European Reform in London.

The summit did not give the European Central Bank political cover to step up its bond-buying aggressively and become a “lender of last resort” to vulnerable nations, Tilford said.

Legally, the bank’s mission is limited to keeping down inflation in the eurozone. But the head of the bank, Mario Draghi, has hinted that he might take more action to stem the debt crisis once European officials sealed a deal to police government spending and borrowing.

“It’s a very good outcome for the euro area,” Draghi said. “It is going to be the basis for much more disciplined economic policy for euro-area members.”

Agreement was reached after marathon negotiations that stretched well into Friday morning. The summit left unsettled some details, such as who would act as enforcer of the new rules. France and Germany still differ on some of those points.

Besides aligning their fiscal policies, the countries also agreed to speed up establishment of a permanent European bailout fund and make a contribution to the International Monetary Fund, money that would go toward protecting countries threatened by the debt crisis.

The agreement is now subject to approval by national parliaments. In at least one eurozone nation, Ireland, it could require approval in a national referendum.

With a significant “Euroskeptic” constituency snapping at his heels in his Conservative Party, British Prime Minister David Cameron went into the summit demanding exemptions for London’s giant financial-services industry from regulations such as a proposed financial transactions tax.

Other European leaders found that unacceptable.

“I did the right thing for Britain,” Cameron told the BBC. “The choice was a treaty without proper safeguards or no treaty. And the right answer is no treaty.”

Anti-EU allies in Parliament hailed his decision, but his domestic critics said Cameron had succeeded only in diminishing Britain’s influence in Europe in exchange for short-lived political gain.

Britain will now have no place at the table when 23, and possibly 26, nations get together to discuss joint economic policy.

“This is perhaps the most serious concern about what happened, not necessarily in the next few weeks but the next few months and years,” said Maurice Fraser, an expert in European politics at the London School of Economics. “There will be corners where Britain will find it difficult to fight.”

Some wonder whether the EU, which agreed Friday to admit its 28th member, Croatia, in 2013, can be credible or even survive in its present form with a marginalized Britain — or whether Britain’s ardent Euroskeptics might press for a complete pullout from the EU.

But Fraser said such a step is inconceivable when continental Europe represents Britain’s biggest trading partner.
“You throw a rabid dog a morsel and it comes back to bite your arm off. But I don’t think that will happen,” he said. “The overwhelming business interest is in seeing Britain remaining a full and influential member within the European Union.
“It would be suicide for the Conservative Party,” Fraser said, “to consider a withdrawal from the EU.”

©2011 the Los Angeles Times

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