Momentous day when a new European union was born

EUROZONE nations have insisted they will press ahead with plans to create a controversial pact over key tax and budget issues to tackle Europe’s mounting debt crisis in a move that will create a deep rift with the UK.

The European Union (EU) said yesterday 26 of its 27 member states will agree a deal for tougher economic sanctions and restoring market credibility and stability.

It came after Prime Minister David Cameron vetoed a revision of the Lisbon treaty in one of the most significant developments in Britain’s 38-year membership of Europe.

European leaders signing up to the pact, such as German chancellor Angela Merkel, insisted the agreement, known as a “fiscal compact”, would be enough to “regain credibility” for the eurozone.

European Central Bank chief Mario Draghi said the accord would lead to “much more discipline in economic policy”.

The bloc would involve the member states tying their finances together in the hopes of solving Europe’s debt crisis, which has seen countries such as Greece and Ireland handed financial bail-outs to rescue their debt-ravaged economies.

Under the terms of the deal, which could be in place by March, the new, tougher rules on spending and budgets would be backed by a treaty between governments rather than an EU treaty involving all members states.

The agreement is viewed as necessary by the 26 nations before the European Central Bank and other institutions commit more money to lowering the borrowing costs of heavily indebted countries in the eurozone.

However, Mr Cameron talked about the “dangers” of the new “treaty within a treaty” and suggested the UK government could go further and block the institutions of the EU being used to enforce the new fiscal rules agreed by the other member states.

The main measures agreed to as part of the new agreement include automatic penalties for countries whose public deficit rises above 3 per cent of GDP, and eurozone and other EU countries providing up to €200 billion (£170bn) to the International Monetary Fund (IMF) to help debt-stricken nations.

Countries signed up to the deal would have to submit their national budgets to the European Commission, which would have the authority to request that they be revised, with members states also having to report in advance how much they plan to borrow.

Mrs Merkel, who had hoped to agree a revision of the Lisbon treaty, said she believed the accord, which will involve the group of nations holding regular meetings on key economic matters without the UK, would stabilise the euro.

She said yesterday: “I have always said the 17 states of the eurogroup have to regain credibility and I believe with today’s decisions this can and will be achieved.”

Germany and France insist the best way of regaining market trust is to beef up the financial governance overseeing the eurozone countries and their budgets.

Mr Draghi called the deal “a very good outcome for the euro area” and said the fiscal compact was “going to be the basis for much more disciplined economic policy for euro-area members”

Christine Lagarde, head of the IMF, welcomed the deal on a new treaty as “an important contribution to helping address the crisis facing the eurozone and strengthening the global economic recovery.”

She said: “I appreciate this demonstration of leadership from Europe, and I am hopeful that others will also do their part.”

European Commission president Jose Manuel Barroso said “those that have approved this new fiscal compact have stated that they want to put it as soon as possible into a new, fully-fledged treaty, after revision of the current treaties.”

He said: “Having seen it was not possible to get unanimity, it was the proper decision to go ahead at least with those ready to commit immediately.

“That includes all 17 in the eurozone, plus some who are not in the euro area but want to take part in this fiscal compact.”

However, Mr Cameron warned there were risks associated with the decisions of the majority of the EU members states opting to go it alone.

He said: “While there were always dangers of agreeing a treaty within a treaty, there are also risks with others going off and forming a separate treaty.

“So, we will insist that the EU institutions – the court, the commission – that they work for all 27 nations of the EU. Indeed, those institutions are established by the treaty and that treaty is still protected.”

The Prime Minister argued that the revised treaty would threaten their national sovereignty and damage London’s financial services industry.

However, Germany and France, the eurozone’s biggest economies, made clear that a deal among the 17 euro countries – and whoever else wanted to join – was better than nothing.

Hungary, the Czech Republic and Sweden said they would need to consult their parliaments, while the other six countries outside the eurozone – Denmark, Poland, Bulgaria, Romania, Latvia and Lithuania – agreed they wanted to join.

The Czech Republic, Sweden and Hungary are also expected to agree to the changes, leaving Britain as the sole dissenter.

Several nations in the agreement are expected to face opposition within their parliaments, with others likely to have to hold referendums on the new accord.

Meanwhile, Herman Van Rompuy, president of the European Council, said the eurozone, with some other EU countries, would provide up to €200bn in resources to the IMF to be used to help countries in trouble.