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Europe forges tighter fiscal union

WASHINGTON — European leaders closed a pivotal week Friday with an agreement in principle to join a new treaty that would force all but one European Union nation into common budget discipline and would empower EU courts to enforce the new rules.

The treaty's rules would allow only small budget deficits, and they would require EU nations to submit their budgets for review by the European Commission, a considerable erosion of their sovereignty. The EU leaders hope to have a draft treaty by March.

Britain, which doesn't use the euro, led the push against a treaty tying all 27 EU countries to tighter fiscal union, arguing that it would threaten its national sovereignty and London's esteemed financial services industry.

U.S. stocks flat-lined for much of the week awaiting the EU summit, and the trading week ended with modest gains on the news that Europe had moved forward, notwithstanding huge unanswered questions on implementation whose answers matter to Americans. The Dow finished up 186.56 points at 12,184.26.

Here are some answers to questions about Europe's new pact and what it means on this side of the Atlantic.

Why should Americans care about Europe's problems?

Beyond cultural and historical ties, we share enormous trade and investment with the EU. Problems there hurt growth here. U.S. exports, one of the few bright spots of the U.S. recovery, already are struggling as Europe enters what economists think is a mild recession.

If a large EU economy such as Spain or Italy sees its problems worsen, it could lead to the kind of global financial meltdown seen after the 2008 failure of U.S. investment bank Lehman Brothers. "Italy blowing up would be as bad as Lehman Brothers, and we all know what happened there," Jay Bryson, a global economist with Wells Fargo Securities Economics Group, said Thursday.

What exactly was agreed?

The treaty would limit government budget deficits to 3 percent of a nation's gross domestic product, the broadest measure of the economy. It would restrict government debt to no more than 60 percent of GDP and would limit the structural deficit — which is independent of the business cycle — to no more than 0.5 percent of GDP.

It wasn't immediately clear when countries would have to meet these targets, but the European Court of Justice would be authorized to enforce automatic penalties if a country violates the rules.

Doesn't this require treaty changes in the charter of the European Union?

That's one of the rubs. Because it would be hard to get 27 national legislative bodies to pass this, the decision was made to opt instead for an intergovernmental pact binding upon acceptance by governmental leaders. Three EU governments that said they liked the pact — Hungary, the Czech Republic and Sweden — cautioned that they would need to consult their parliaments before accepting it as binding. Thus, this pact isn't nearly as leakproof as a treaty change.

What did Europe's leaders fail to accomplish?

Friday's pact is notable for what it didn't do as much as for what it did do, according to Nariman Behravesh, the chief economist for forecaster IHS Global Insight: "It doesn't increase the size of the bailout fund. It doesn't solve the issue of what happens to Italy, to Greece. It's (just) a step forward in the long road ahead."

European leaders have been trying to create a massive bailout fund — at one point envisioned at more than $1 trillion — to backstop struggling governments in Portugal, Italy, Ireland, Greece and Spain.

What are the political ramifications of Friday's deal?

The idea of an integrated Europe appears to have been strengthened. This is of great importance to Germany — Europe's economic engine — which has been cautious in wielding power because of its Nazi past.

What about Great Britain?

Britain never wanted to adopt the euro, but in recent years it has more closely aligned its economy with Europe's. Britain's conservative government finds collective European decisionmaking distasteful, and it feared that its prized financial sector would be threatened. Friday's deal makes the chances of Britain adopting the euro more distant, and it weakened Britain's political commitment to the EU.

Information from the Associated Press and McClatchy News Service was used in this report.

Europe forges tighter fiscal union 12/09/11 [Last modified: Friday, December 9, 2011 11:23pm]
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