Twenty-three European Union states agreed Friday to set up a new treaty, giving up crucial powers over their own budgets in an attempt to overcome a crippling debt crisis.
Q: Who's in it?
A: All 17 countries that use the euro, plus Denmark, Latvia, Lithuania, Poland, Romania and Bulgaria. Those six states are likely to eventually adopt the common currency, so it makes sense for them to subscribe to the rules now.
Q: Who's not in it?
A: The U.K. and Hungary gave a clear "no," while Sweden and the Czech Republic left the door open to sign up at some point.
Q: Why did Europe need a new treaty?
A: For the past two years, the countries that share the euro have been rocked by a debt crisis that has recently threatened the survival of the common currency itself. Germany and France in particular argued that only tough rules enshrined in a treaty would convince markets that all countries will be able to repay their debts and a similar crisis will never happen again.
Q: How will that be achieved?
A: Debt brakes in national constitutions: All 23 countries commit to keep their deficits below 0.5 percent of economic output. That cap can only be broken in exceptional circumstances or to counteract a recession. The European Court of Justice will make sure all states' debt brakes are effective.
— More automatic penalties for deficit sinners: It will be more difficult for countries to stop one of their partners from being punished for breaking the EU's debt and deficit rules. In the past, governments often protected their partners from being sanctioned.
— All states have to tell their partners in advance how much debt they plan to take on through bond sales.
Q: What else did they decide?
A: The eurozone, together with other willing EU states, will give as much as euro200 billion to the International Monetary Fund, so that the IMF can help beef up the eurozone's firewalls.
— The eurozone's new, permanent bailout fund, the European Stability Mechanism, will take over from the current rescue fund, the European Financial Stability Facility, one year ahead of schedule, in July 2012. Unlike the EFSF, a hastily set up private company owned by all eurozone states, the ESM is a permanent organization run by governments. It also has paid-in capital, similar to a bank, and is therefore more credible on financial markets.
— Decision-making in the ESM was simplified in emergency situations, giving a majority of 85 percent of capital holders the power to decide on giving a struggling country a bailout. That is meant to stop small countries from blocking or slowing down urgent rescues, as has happened in the past.
— The eurozone scaled back the rules to force banks and other private investors to take losses when a country gets a bailout from the ESM. The previous push to inflict losses on bondholders has been blamed for exacerbating the crisis.
Q: What did they fail to agree on?
A) Eurozone leaders did not decide to boost the overall firepower of their own bailout funds, which is currently limited to euro500 billion. They promised to reconsider that cap in March, shortly before the ESM comes into force.
— They did not give a clear signal that the European Central Bank will take on a bigger role in fighting the crisis by buying up bonds from struggling countries on a massive scale to keep their funding costs in check.
— They did not agree to more intrusive powers for the European Commission over the fiscal policies of wayward states, as had been demanded by European Council President Herman Van Rompuy and some nations. Instead, they promised to "examine swiftly" much more lenient proposals from the Commission.
4) They did not allow the bailout funds to directly recapitalize failing banks. That could have prevented countries from taking on more debt when they have to bail out lenders.
Q: Will it work?
A: Initial market reaction to the deal was lukewarm and many of the details of the new treaty and how the firewalls will function remain to be worked out. After many summits that claimed to have ended the crisis, investors and analysts have become cautious in their assessment of yet another grand declaration. Much will depend on whether the stricter fiscal rules can persuade the ECB to unleash massive funds to buy up eurozone bad debt.
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