David Cameron Blocks Eurozone Deal Putting UK At Risk Of Isolation
Prime Minister David Cameron has been criticised for "isolating" the UK from the EU after he vetoed a crucial treaty designed to deal with the eurozone crisis because it was "not in Britain's national interest".
The treaty governing all 27 EU members is now likely to be abandoned, but the 17 eurozone countries will continue to negotiate a separate stability pact, and nine of the 10 EU members not in the single currency have chosen to endorse that process.
The UK will be the only EU member left outside the deal, the Council of Europe has indicated, despite earlier suggestions that Sweden, Hungary and the Czech Republic would not take part.
The move was criticised by Labour leader Ed Milliband, who said that Cameron had "spectacularly mishandled" the negotiations. Some Lib Dems also attacked the decision, with LibDem MEP chief whip Chris Davies saying that it had left the UK "isolated".
Countries who sign up to the stability agreement are likely to be forced to have balanced budgets, and a structural deficit of not more than 0.5% of gross domestic product.
The deal also includes sanctions for nations if their deficit is larger than 3% of GPD.
German Chancellor Angela Merkel said that the EU had "learned from the mistakes of the past".
In a press conference on Friday she said: "The British were never part of the euro, they had an opt out from the beginning so we are familiar with the situation.
"We couldn't make a lousy compromise for the euro but we had to set up hard rules. That's how it was. But that will not stop Europe going forward together on other issues."
European stock markets appeared to react positively to the summit, rallying in early afternoon following a choppy morning.
After a 10-hour marathon of negotiations in Brussels overnight, David Cameron told journalists he could not present the deal to parliament with a clear conscience.
"We want the eurozone countries to come together and solve their problems," he said. "But we should only allow that to happen within the EU treaties if there are proper protections for the single market, for other key British interests.
"A treaty within a treaty without safeguards wasn't right for Britain. It is not easy when you are in a room with other people who all want to press ahead and say 'forget about your safeguards, forget about your interests, let's sign up to this together'. It's the right thing to say that I cannot do that and that it's not in our interest."
Some commentators have suggested the move could be the "beginning of the end for Britain in Europe" but reaction to Cameron's veto has been mixed.
Conservative backbencher Mark Reckless said on Friday morning that the move could see Britain become more like Switzerland - a member of the single market but not in the EU.
French President Nicolas Sarkozy said Cameron's demands to block a Europe-wide financial transaction tax, which would hit the City of London meant an agreement "wasn't possible, given the position of our British friends".
Foreign Secretary William Hague told the BBC on Friday morning that the prime minister had sought consensus on using the veto across the coalition, adding Nick Clegg had "absolutely" agreed the decision.
He said the agreement "doesn’t leave us in any way isolated in Europe overall."
While Deputy PM Nick Clegg said in a statement that Cameron's demands were "modest and reasonable", several Lib Dem MEPs and MPs publicly criticised the move - a sign that the deal may hurt the coalition.
Chris Davies, the Lib Dem chief whip in the European parliament, said that Britain had taken "a step towards irrelevance".
In a blog post for Public Service Europe he wrote: "The lies, the bile and the sheer xenophobia that pours from much of Britain's press have shaped public attitudes and strengthened the Europhobes. The latter have had their way. In a world in which the influence of the old powers is diminishing by the day, Britain's prime minister has attacked his closest partners and left our country weaker and more isolated."
Lib Dem MP Martin Horwood tweeted: "Worrying picture emerging in Brussels. Worst scenario is UK, Hungary out; 26 others in. Difficult to maintain UK influence from there."
Labour also hit out at Cameron saying his use of the veto was a "sign of weakness".
Ed Miliband said said the prime minister had mishandled negotiations spectacularly.
Shadow foreign secretary Douglas Alexander told the BBC's Today programme that Britain would no longer be "in the room".
“We’ve got most of the European Union countries signing up to an agreement where Britain will not be present in the room, despite there being very significant decisions being taken within the room," he said.
Banks that need to raise extra capital to meet the European Banking Authority's capital requirements may need to turn to their governments for help, and that could spur a vicious cycle of rising borrowing costs for European governments and increasing strains on banks, Bloomberg News reported on Sunday.The European Banking Authority ordered banks in the European Union last week to raise $154 billion in new capital by June of 2012. But not all banks may be able to meet those requirements, especially since 70 percent of banks that need to raise new capital reside in countries that are in danger of default, according to Bloomberg. If governments aid their banks, then investors would lose more faith in those countries' abilities to pay their debts and demand higher interest rates, which would further trouble banks' balance sheets.
"If the Southern governments put money in their banks, their sovereign debt will go up, exacerbating their problems," Karel Lannoo, chief executive of the Centre for European Policy Studies in Brussels, told Bloomberg. "Then the banks' losses will rise because they hold the government debt. That’s a vicious cycle. It's hard to know which one to stabilize first, the sovereign bonds or the banks."
Gergely Kiss, director at Fitch Ratings, said in an interview with The Huffington Post that "financial tension" in Europe is "feeding slowly into the real economy."
"There is the fear that this will have an impact on domestic demand," he said.
Fitch Ratings released a report today forecasting that the eurozone economy would grow 0.4 percent in 2012, with growth slowing throughout the year.
The German bank Commerzbank is in talks with the German government about the possibility of obtaining a bailout, Reuters reports.
Commerzbank, the country's second-largest ban has said that it wants to avoid a bailout but still needs to raise $7 billion in capital by the summer of 2012 to meet the European Banking Authority's requirements, according to Reuters. Commerzbank is 25 percent owned by Germany.
Harvard historian Niall Ferguson wrote in a column on Friday that Europe is in danger of repeating the mistakes of the early 1930s, when the Great Depression became truly great. He wrote:
In the past few months, incompetent leadership has brought the euro-zone economy, and with it the world economy, to the edge of a precipice strongly reminiscent of 1931. Then, as now, it proved impossible to arrive at sane debt restructurings for overburdened sovereigns. Then, as now, bank failures threatened to bring about a complete economic collapse. Then, as now, an excessively rigid monetary system (then the gold standard, now the euro) served to worsen the situation....
The course on which the continent has now embarked means not just the creation of a federal Europe, but a chronically depressed federal Europe. The Eurocrats have exchanged a Stability and Growth Pact—which was honored only in the breach—for an Austerity and Contraction Pact they intend to stick to. The United Kingdom has no option but to dissociate itself from this collective suicide pact, even if it strongly increases the probability that we shall end up outside the EU altogether.
John Hussman, president of Hussman Investment Trust, wrote in a report on Monday that "the present market environment warrants unusual concern" largely because the European Central Bank is unlikely to come to the rescue in Europe. He wrote:
Read [Mario] Draghi's lips: the ECB will not be initiating massive purchases of distressed European debt unless and until the EU Treaties themselves are explicitly changed.... In effect, if a fiscal union is achieved without treaty changes, the ECB is unlikely to act. But even if treaty changes are achieved, the ECB is unlikely to act forcefully unless those changes are credible. Of course, if the changes are credible, then forceful actions will not be needed anyway. In any event, the problem for bailout-hungry investors is that they will be deeply disappointed if they expect Mario Draghi to turn into Ben Bernanke.
Author and political analyst Paul Hockenos writes in Foreign Policy that the European debt crisis includes Germany:
Also, there's yet another level of German hypocrisy in its holier-than-thou protestations concerning the poor periphery's debt. All of Europe is highly indebted and while the European-side of the transatlantic crisis opened on the shores of the Mediterranean, it is now an pan-European crisis -- and that includes Germany, one of the first countries to breach the Maastrict debt ceilings. According to I.M.F. numbers, gross government debt in Germany will be nearly 83 percent of gross domestic product by 2012.
Over on HuffPost High School blogger Devon Kerr has a good simple explainer on the crisis for teenagers. It's worth a look for anyone trying to figure out what's going on. Read it on HuffPost High School.
American stocks plunged on Monday as investors became increasingly fearful that the eurozone debt crisis did not reach a resolution at all at last week's summit for the European Union in Brussels. The Dow Jones Industrial Average fell 224.86 points as of 12:21 p.m. ET, and the S&P 500 fell 2.01 percent, according to Google Finance.
The U.S. stock market plunge, following a two-week rally, was due in part to Moody's Investors Service's announcement that it would review the credit ratings of all countries in the European Union, according to Bloomberg News.
"The European stopgap may not be successfully implemented," Stanley Nabi, vice chairman of Silvercrest Asset Management Group, told Bloomberg, referring to the deal reached last week. "In order for this program to be successful, there’s going to have to be a lot of belt tightening. That means that the European economy is not going to do well at all. That would have negative impact on other countries around the globe."
The credit ratings agency Fitch Ratings said in its global economic outlook report that it expects major advanced economies to grow just 1.2 percent in 2012, less than in 2011.
Fitch said that it expects growth in the eurozone to weaken to 0.4 percent in 2012 because of budget cuts across the continent and tighter credit. Fitch added it expects the economic output of Italy -- the eurozone's third largest economy, which investors fear could default on its debt -- to shrink 0.5 percent in 2012.
Wolfgang Munchau, associate editor of The Financial Times, wrote in a column that the summit in Brussels last week was a failure, and that European leaders should have admitted it. He wrote:
The eurozone is facing a generalised loss of confidence. Investors no longer trust its crisis management, the solidarity of its citizens, even the ability to conduct sensible economic policies. The EU is not going to restore confidence through legal gimmickry that will face numerous court challenges....
Remember what everybody said a week ago? To solve the crisis, the eurozone requires, in the long run, a fiscal union with a prospect of a eurozone bond and, in the short run, unlimited sovereign bond market support by the European Central Bank. What we now have is no treaty change, no eurozone bond and no increase either in the rescue fund or in ECB support.
French President Nicolas Sarkozy prepared France for a possible downgrade of the country's AAA credit rating by S&P, promising to slash the deficit without hurting salaries and pensions as elections loom, Reuters reported.
Sarkozy told the newspaper Le Monde that he would respond "with a cool head" if France lost its AAA credit rating, which helps allow France to finance its debt cheaply. "It would be one more difficulty, but not insurmountable," Sarkozy said.
Prime Minister David Cameron is addressing Parliament now, explaining why he vetoed the EU pact. He says he makes "no apology" for rejecting a treaty which lacked proper safeguards, reports HuffPost United Kingdom, which is live blogging Cameron's speech.Get real-time updates on Cameron's speech.
Moody's Investors Service, the credit agency, said on Monday that it would review the credit ratings of all countries in the eurozone early next year, according to Bloomberg and The Wall Street Journal.Last week's agreement to tighter fiscal rules did not offer much that was new, Moody's said in its weekly report, according to Bloomberg. “In the absence of any decisive policy initiatives that stabilise credit market conditions effectively, our intention as announced in November is to revisit the level and dispersion of ratings during the first quarter of 2012,” Moody's said in the report.
The credit rating agency S&P warned on Monday that last week's agreement on tighter budgetary rules was not enough, and that another financial shock may be necessary to force European leaders to do what is necessary to stave off a breakup of the eurozone, Reuters reported.
"There is probably yet another shock required before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term," Jean-Michel Six, chief economist of S&P, said in Tel Aviv, according to Reuters. "Then there would be a recognition that everybody is indeed on the same boat and that even German institutions can be affected by this contagion. I'm afraid this may still be required."
S&P placed 15 eurozone countries -- six of which have a triple-A credit rating -- on watch for a credit rating downgrade last week, according to Reuters and The Financial Times.
The Royal Bank of Scotland wrote in a report that the two European bailout funds, the European Financial Stability Facility and European Stability Mechanism, likely would be downgraded as well, according to the FT. RBS added that while large European banks would be in danger of being downgraded, some smaller Italian and Spanish banks -- such as Banco Popolare and Banco Santander -- may veer closer toward failure, according to the FT.
European stocks plummeted on Monday, as investors feared that the continent's agreement on Thursday night to enforce tighter budgetary rules still did not address the short-term threat of a market panic potentially breaking up the eurozone.
The DAX in Germany plunged 2.51 percent, and the CAC 40 in France fell 1.89 percent, according to Google Finance. Milan's stock index also fell 2 percent as Italy's three largest labor unions started a weeklong strike, according to the Associated Press.
Italy's three largest unions have called on millions of members to strike between three and eight hours on Monday, and expects the events to last throughout the week, according to the Wall Street Journal.
The unions are protesting Prime Minister Mario Monti's austerity package, which aims to make 20 billion euros (or $38 billion) in cuts, according to the WSJ. After more than two hours of talks on Sunday, the unions failed to reconcile their differences with Monti over his plans to raise the retirement age and freeze pension payments for everyone except the poorest citizens, The Financial Times reports.
The strikes will reverberate across daily life in Italy. Italy sold all the government bonds it had on sale at a bond auction Monday, with demand nearly double the amount of bonds available, according to The Financial Times.
The Italian Treasury sold 7 billion euros of one-year government bonds at an interest rate of 5.952 percent -- lower than the interest rate of 6.087 percent at the last one-year Italian government bond auction on November 10, when Italian interest rates started to spike, according to the FT.
The interest rate on ten-year Italian government bonds is currently 7.19 percent, according to Thomson Reuters.
-- Bonnie Kavoussi
Concerned that some European countries are in danger of defaulting, European banks have slashed their holdings in troubled European government debt, according to The Financial Times.
European banks have sold 65 billion euros, or $87 billion, in the government debt of countries viewed as in danger of defaulting, or about 13 percent of their total holdings. They have sold the debt largely to the European Central Bank and a few hedge fund investors. Now European banks have reduced their exposure to Italy, Portugal, Greece, Ireland, and Spain to 513 billion euros, or $686 billion.
The European Banking Authority released the figures late Thursday as part of their stress test of European banks.
According to the Daily Telegraph the plan by France and Germany to build a separate fiscal union is an “abuse of power”, according to confidential legal advice.
|@ TelePolitics : EU Treaty: new EU plan 'abuses power', say lawyers http://t.co/8IEQvHMm|
Foreign Office minister David Lidington has rejected the idea that Britain will now be utterly isolated in Europe.
He told Sky News: "I find there is not only a wish to work with Britain to come up with the right solution … there is a huge common agenda to make Europe as a whole more competitive as a whole."
And he said he did not think the eurozone countries would act as a "monolithic, cohesive bloc" in future negotiations.
HuffPoUK's business editor Peter Guest has an analysis of where Europe is going now (without the British)
|@ BBCNews_UK : #BBCNEWS VIDEO: 'PM kicked eurozone in teeth': The Liberal Democrat's chief whip in Europe, Chris Davies, has la... http://t.co/mhm5zPeY|
Former Lib Dem leader Lord Ashdown is apparently not too happy about what has happened, according to the Guardian's political editor Patrick Wintour.
|@ patrickwintour : Foreign policy priorities of this country for the past 40 years has gone down the plughole in a single night. Lord Ashdown|
Conservative MP Mark Pritchard, a eurosceptic and the chairman of the Tory backbench 1922 committee, has said it is now more likely there will be a referendum on Britain's membership of the EU.
He told Conservative Home: "I welcome the Prime Minister's stand. He is to be given credit. However it is now clear that the United Kingdom's relationship with the EU will significantly change given the emergence of a new inner EU-bloc, a dominant bloc.
"It seems more, not less likely that there will be an EU referendum on the UK's relationship with the EU within this Parliament."
The Confederation for British Industry (CBI), a major trade association, has issued a statement that seems to say very little.
“The mist is still clearing on the implications of the new treaty. New fiscal rules seem to be coming together but the all-important question of lender of last resort does not seem to have been resolved yet. The markets will decide if what has been done over the last two days is enough," John Cridland said.
The CBI has maintained a policy on Europe that at times has bordered on the conflicted, insisting on one hand that the EU's centralised regulation poses a grave threat to the UK's financial sector, but on the other that UK companies need to use their membership of the trade union to its fullest potential.
As with all big news events people have taken to Twitter ... to make fun of it.
Top tweets include: "Good news: I have vetoed David Cameron as he is not in Britain's interest" and "Brilliant tactical victory for Cameron. Europe is now completely isolated".
The BBC is reporting that, according to AFP, a top US general is concerned about violence in Europe.
General Martin Dempsey says he is "extraordinarily concerned" about the potential for civil unrest and the breakup of the European Union.
Gen Dempsey is chairman of the Joint Chiefs of Staff, he said: "In some ways we're exposed literally to contracts but also (we are concerned) because of the potential of civil unrest and break-up of the union that has been forged over there."
Clegg's support for Cameron's decision may not be as fulsome as first reported.
Kiran Stacey, the FT's political correspondent has noted:
|@ kiranstacey : Clegg has done a TV clip: "Any eurosceptic rubbing their hands in glee shd be careful what they wish for." Warns of "2-speed Europe".|
This is the picture taken by the Press Association's Chief Political Photographer Stefan Rousseau featuring Cameron and his wife Samantha during a street party to celebrate the royal wedding in Downing Street.
It will appear on the prime minister's Christmas card for 2011.