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EU sets sights on treaty change

BRUSSELS (Reuters) - The European Union on Friday set in motion plans to amend the EU’s main treaty to create a permanent system to fight financial crises, and said a summit deal on new budget rules would strengthen the euro.

Prime Minister David Cameron holds a news conference at the end of a two-day Summit of the European Union Heads of States and Governments October 29, 2010. REUTERS/Eric Vidal

The moves, intended to head off any sovereign debt problems, face a long and potentially divisive battle before they take effect and EU sources said the head of the European Central Bank had expressed reservations about some of the proposals.

But the agreement on limited treaty change at a two-day summit in Brussels, and the endorsement of tougher budget rules [ID:nLDE69I1FB], was a victory for Germany’s push for greater financial stringency following Greece’s debt crisis.

“We are doing everything to ensure that there will never be a repeat of the crisis we have had,” German Chancellor Angela Merkel told reporters. “One can already say that the euro will be strengthened.”

She won guarded praise in the German media for a compromise that bought time to find a lasting remedy to the bloc’s debt problems, offering her some respite from criticism that she had bowed too easily to French demands to water down proposals for semi-automatic sanctions on budget rule-breakers.

Any failure to reach a deal and any sign that the EU was backtracking on efforts to tighten fiscal discipline could have unsettled investors already worried by debt problems in countries such as Portugal, Greece and Ireland.

Leaders of the 27 EU states committed the bloc to treaty changes to create a permanent mechanism that will replace a 440-billion euro ($611 billion) emergency safety net for indebted euro zone countries when it expires in mid-2013.

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Herman van Rompuy, the president of the EU Council grouping national governments, will draw up proposals to amend the Lisbon treaty in cooperation with the executive European Commission and the leaders hope to agree on the changes in December.

“The European Council has sealed a solid pact to strengthen the euro. That’s one of the most important decisions that we have taken in the last months,” Van Rompuy told reporters.

TRICHET’S CONCERNS

Germany and France overcame initial hostility to their calls for the treaty amendments, reached in a deal on October 18 which smaller states saw as a stitch-up by the EU’s dominant powers.

“If the biggest country in the EU wants something, it’s probably not unrealistic to say that it’s going to get it,” said Hugo Brady, a political analyst at the Centre for European Reform think tank.

But most other countries ruled out far-reaching changes that would have forced them to hold public referendums they would have been likely to lose.

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The leaders agreed the amendments would have to be limited and that an existing rule that EU countries cannot assume the debt of another member of the bloc must stay.

Calls by Berlin to suspend the voting rights of countries that breach the budget rules were also put on the back burner and could eventually be dropped, but some EU officials said Germany had always known they were unlikely to win support.

The permanent crisis mechanism will involve private investors, the International Monetary Fund and strong conditions on which funds would be lent to countries in need.

Senior EU sources said European Central Bank President Jean-Claude Trichet had reiterated concerns at the summit that the budget rules were not tight enough and said difficult negotiations on the permanent mechanism could upset markets.

French President Nicolas Sarkozy hit back, saying: “The European Council was unanimous and it gave Mr Trichet the response it wanted.”

Political analysts say the EU must now work hard to ensure it does not now slip into years of introspection, as it did during long negotiations on the Lisbon treaty which became law 10 months ago -- only to soon face calls for amendments.

Reporting by Brussels bureau, writing by Timothy Heritage, editing by Rex Merrifield and Myra MacDonald

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