Hungary also declined to sign on, with the Czech Republic and Sweden both requesting more time to consult their respective parliaments.
The impasse with Britain in particular effectively blocked the bid by Berlin and Paris to rewrite full European Union treaties to enshrine fiscal discipline. Instead, 23 nations in Europe, headed by Germany and France, agreed to forge their own treaty pact, including penalties for big spenders. The deal will be fleshed out in the coming months, and could be enacted faster than the more sweeping and cumbersome EU-wide accord originally sought by France and Germany.
In addition, the 23 nations agreed to increase the financial resources available to aid troubled nations in the region, pledging to make available an additional $268 billion to the International Monetary Fund. They also agreed to move up the establishment of a new $670 billion European bailout fund by one year, while keeping in place a $590 billion temporary fund, effectively enlarging the total amount available.
“We are doing everything we can to save the euro,” French President Nicolas Sarkozy said early Friday morning.
A positive view of a deal by the European Central Bank has been viewed as essential to the institution doing more to combat the region’s debt crisis, and the agreement early Friday appeared to fit the ECB’s bill. Mario Draghi, ECB head, lauded the deal as a “very good outcome for euro area members.” But stock markets in Asia were trading lower on news of the outcome in Brussels.
Nevertheless, the failure to win full approval from all EU nations appeared to be a political blow to European unity. Britain’s Prime Minister David Cameron, for instance, talked Friday morning about how thrilled he was that Britain had kept the pound, and forgone the euro, suggesting he did not feel comfortable binding his nation closer to the region in a deal that involving something as sacred as national budgets without special assurances.
“I’m afraid I cannot do that. It is not in my national interest,” Cameron said.
Leaders from the E.U. member states negotiated deep into the night, seeking to bridge differences on a pact that would set limits on government borrowing and spending that only a handful of European countries currently meet. That was seen as key to restoring confidence in European economies.
Still, many had expected that it would be difficult to reach an E.U.-wide accord.
If the pact among the 23 nations holds, it could usher in a new era of austerity across Europe, unleashing a wave of even deeper government spending cuts and, in some cases, higher taxes. The magnitude of the challenge was underlined Thursday by revelations that the region’s ailing banks require fresh capital injections of $153 billion and by the spectacle of jittery markets falling in New York, London and Tokyo.
Analysts had said that a grand bargain struck in Brussels could begin to restore investors’ confidence in the ability of the region’s indebted nations to pay their bills, easing borrowing rates in trouble spots such as Italy and potentially preventing a catastrophic debt default in a major European country.
The toughest solution being considered would enshrine in European treaties limits on budget deficits and national debt, with violations punishable by automatic penalties. The proposals set a standard so strict that not even Germany, the continent’s powerhouse, currently meets it.
Depending on the pace of cuts envisioned, economists warn, a deal here could morph into a “negative stimulus,” zapping billions of euros out of the region’s economy at a time when it is teetering on the verge of another recession. Underscoring that threat, the European Central Bank on Thursday cut the region’s key interest rates and warned that its economy was in danger of tanking.
Though not as devastating as a default in a country such as Italy — an event that could trigger a new global financial crisis — years of sluggish growth or economic contraction in Europe could still ripple around the world. In China, for instance, hundreds of factories have shuttered as exports to Europe have fallen.
Meanwhile, economies across the European Union, where many nations began enacting rounds of deep budget cuts months ago, are slowing, leaving consumers more afraid to open their wallets.
“For some countries, it might be feasible to reach these new levels of debt, but the result will be a long-term recession across the entire euro zone as countries cut spending,” said Constantin Gurdgiev, adjunct lecturer of finance at Trinity University in Dublin. “Even if you give countries a time frame of 20 years, the constant austerity required to do it will be great.”
Strict new standards on government borrowing and spending could drive up unemployment rates and spark further reductions in long-cherished social safety nets. Countries such as Ireland and Greece, which are suffering under brutal austerity programs mandated by international bailouts, could find themselves locked into even more drastic cuts, which would undermine their ability to keep offering full benefits to some of their most vulnerable citizens, including the poor and the unemployed.
But for countries such as fiscally conservative Germany, where Chancellor Angela Merkel is pushing the hardest for tight restrictions on borrowing and spending, painful new limits are viewed as fundamental to shoring up the foundations of the euro and setting the region on a path toward deeper economic integration. Germany is likely to resist any move to have its taxpayers support countries such as Greece and Italy through regional “euro bonds” unless those countries are first operating on a tight fiscal leash.
“Overcoming the current crisis requires us to take a closer look at its causes,” Merkel said Thursday before traveling to Brussels. “And one of the causes is the major level of debt in some member states.”
In Washington, President Obama voiced concern Thursday about the events unfolding in Europe, saying, “If we see Europe tank, that could obviously have a big impact on our ability to generate jobs in the United States.” He noted that European leaders recognize the seriousness of the problem but added, “The question is whether they can muster the political will” to solve it.
A key question yet to be answered here is how long countries will be given to meet any new guidelines. If a deal pushes strict limits too quickly, “everybody will have a problem,” said Fernando Fernandez, an economist at IE Business School in Madrid. “You cannot expect any countries — not Spain, not Germany — to reduce their debt [by] 20 points of GDP in three years.”
Germany is working toward reducing its deficit to 0.35 percent of GDP by 2016, a process made easier by economic growth that has remained ahead of the rest of the euro zone. Still, even in mighty Germany, cuts will have to be made. The tightest standards being weighed here, if adopted, are so severe that analysts question whether the biggest basket cases, such as Greece, could hope to meet them even within a time frame of many years.
To meet a proposed cap on total national debt of 60 percent of GDP, for instance, Greece would need to halve its debt load. To reach such a goal without defaulting on its obligations to investors, Greece would be forced to impose drastic new austerity measures on a population that has already seen historic cuts in public wages, state payrolls and social benefits in recent months.
If fresh austerity does slow growth across Europe for years, economists warn it could make it increasingly difficult for deeply indebted countries such as Italy to dig themselves out of their financial holes anyway, raising the specter of another debt crisis down the line.
“Already, the Mediterranean economies are contracting rapidly, and Germany and other more-prosperous states are at near-zero growth,” Peter Morici, a business professor at the University of Maryland, wrote in an analysis of the harshest terms being advocated by Berlin and Paris.
“Rising unemployment will feed on itself, national tax bases will shrink, and sovereign debt will become less manageable,” he said. “Private investors, though perhaps initially comforted after Merkel’s reforms are adopted, again will become skeptical that Italy and the others will pay their debts and flee government bonds.”
Birnbaum reported from Berlin.