Europe split today in a historic rift over building a closer fiscal union to preserve the euro, with an overwhelming majority of countries led by Germany and France agreeing to forge ahead with a separate treaty, leaving Britain isolated.
The outcome of the two-day European Union summit in Brussels left financial markets uncertain whether and when more decisive action would be taken to stem a debt crisis that began in Greece, spread to Portugal, Ireland, Italy and Spain and now threatens France and even Germany.
A new treaty could take three months to negotiate and may require referendums in some countries. Two ECB sources said the European Central Bank would keep purchases of euro zone government bonds capped for now and not take extra action.
The deal is fraught with danger for the Irish Government as a referendum may be necessary to ratify a new treaty. Taoiseach Enda Kenny declined to say this afternoon whether or not a referendum will be required to ratify the new intergovernmental treaty.
Speaking after the conclusion of the summit of EU leaders in Brussels today, Mr Kenny would not be drawn on giving an opinion on the necessity of a referendum, or whether a treaty change would necessitate a sufficient transfer of competence from the State to trigger one.
Mr Kenny said the Attorney General will give legal advice to the Government "in due course on the issues of substance that are in the language [of the agreement]."
Earlier, Minister of State for European Affairs Lucinda Creighton said there was a 50-50 chance of a referendum on closer fiscal union between the 17 euro zone states.
Tonight, the White House welcomed the EU agreement for deeper economic integration in the euro zone, describing the deal as "progress", but added that more needed to be done.
"We think that signs of progress are good, that this is a sign of progress, but more still needs to be done, obviously," White House spokesman Jay Carney said.
Global stocks rebounded and the euro rose after the deal. Yields on Italian debt also rebounded and fell below the 7 per cent threshold seen as unsustainable. However, traders said frequent European Central Bank purchases offset disappointment over the prospect for a quick end to the crisis.
Twenty-six of the 27 EU leaders agreed to pursue tighter integration with stricter budget discipline in the single currency area, but the EU’s third largest economy Britain said it could not accept proposed EU treaty amendments after failing to secure concessions.
After 10 hours of talks that ran into the early hours of this morning, all 17 members of the euro zone and nine countries that aspire to join resolved to negotiate a new agreement alongside the EU treaty with a tougher deficit and debt regime to avoid a repetition of the debt crisis in future.
"The heads of state or Government of Bulgaria, Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania and Sweden indicated the possibility to take part in this process after consulting their Parliaments where appropriate," said the draft summit conclusions.
The nine non-euro states said they would consult their parliaments, where appropriate, on taking part in the process. After a long night of wrangling, Britain's few allies melted away in the Brussels dawn.
"Not Europe, Brits divided. And they are outside of decision making. Europe is united," Lithuanian President Dalia Grybauskaite said in blunt English.
One senior EU diplomat called British prime minister David Cameron's negotiating tactics "clumsy". Among other issues, he had sought a right to veto a proposed financial transaction tax, which may be voted through by a majority over the objections of the City of London financial centre.
Taoiseach Enda Kenny said Ireland's economic security had been defended and protected and a great deal of work had been done in terms of putting together "firewalls" to prevent contagion. Mr Kenny said he put the burden of the bank bailouts on the table in negotiations.
"Specifically in Ireland's case I raised the exceptional difficulty that Ireland has gone through having to borrow very extensively for the requirement of the bank recapitalisation and the challenge that places for us," Kenny told reporters after the summit. "I put that firmly on the table."
Minister for Europe Lucinda Creighton said Dublin and many other member states expect the central bank to take a more pro-active approach to the debt crisis in the weeks ahead.
Ms Creighton also said there was a 50-50 chance that Ireland would have to hold a referendum on ratifying a fiscal union treaty. Irish voters have rejected EU treaties twice in the last decade in plebiscites, holding up their entry into force, only to reverse their vote later under strong European pressure.
Voters in any referendum this time will cast their ballots in the knowledge that Ireland is receiving an EU bailout, and that it will not be able to prevent other countries going ahead without it.
ECB president Mario Draghi called the decision a step forward for the stricter budget rules he has said are necessary for the euro zone to emerge stronger from the turmoil.
"It's going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members," Mr Draghi said. "We came to conclusions that will have to be fleshed out more in the coming days."
Two ECB sources said the bank's governing council decided last night to keep bond buying limited to about €20 billion a week and there was no need to review the decision in the light of the summit outcome.
"You will see some further purchases but not the huge bazooka that some people in the markets and the media are awaiting," one central banker said on condition of anonymity.
But French president Nicolas Sarkozy told reporters the ECB's move to provide unlimited three-year funds to cash-starved European banks would be more effective, by enabling them to continue buying government bonds. "This means that each state can turn to its banks, which will have liquidity at their disposal," he said.
German chancellor Angela Merkel said she was satisfied with the decisions. The world would see that Europe had learned from its mistakes and avoided "lousy compromise", she said.
Dr Merkel said she had not given up hope that Britain would eventually agree to change the EU treaty to anchor stricter budget discipline, with automatic sanctions for deficit offenders.
Mr Sarkozy sounded elated at having united a big group around the euro zone as the EU's core, long a French objective. "This is a summit that will go down in history," he said. "We would have preferred a reform of the treaties among 27. That wasn't possible given the position of our British friends. And so it will be through an intergovernmental treaty of 17, but open to others."
One EU diplomat summed up the outcome as: "Britain seethes, Germany sulks, and France gloats."
Active ECB support will be vital in the coming days with markets doubting the strength of Europe's financial firewalls to protect vulnerable economies such as Italy and Spain, which have to roll over hundreds of billions of euros in debt next year.
Speaking this evening, French central bank chief Christian Noyer said today's "historic" agreement should help stabilize investor sentiment toward the euro zone.
"I am convinced that this should be well received and that should allow interest rates to fall," he said.
Agencies
