31/01/2012 06:14 GMT

European Leaders Agree Fiscal Pact, Talk Up Growth Plans, Czechs Drop Out

Europe's race towards fiscal integration saw another member drop out on Monday, as the Czech Republic joined the UK on the sidelines of a treaty to enforce tighter economic discipline within the single currency zone.

The 17 countries in the euro, and eight others, agreed to move forward with the treaty, proposed at the last meeting of European leaders in December. The pact will create new fiscal rules within member states, and give the European Court of Justice the ability to enforce them.

Countries will no longer be allowed to run up unlimited amounts of national debt, and will have to put legislation in place to prevent governments from ignoring them. All plans to issue public debt, and all major economic reforms will now need to be coordinated with other member states and with EU institutions.

Greece, which remains on default-watch as it struggles to agree a write-down with its private creditors, currently has a debt totalling 160% of its gross domestic product (GDP), while Italy has a ratio of around 120%.

As well as debt, leaders also talked about the imperative to drive economic growth in the eurozone. While some dim hopes remain that the single currency area may avoid a recession, it is currently experiencing a crisis in output and job creation.

Figures released on Tuesday show that the number of jobless in the eurozone rose to nearly 16.5m, or 10.4% - a record high since the single currency zone was created in 1999.

Unemployment in Greece is nearly 19%, and the country remains in a recession that could drag on for years. Its struggle to create jobs and growth is exacerbating its debt worries, undermining confidence in its ability to ever pay its loans back.

Spanish GDP data showed a 0.3% contraction in the fourth quarter of 2011, increasing concerns that it might be heading for a full-blown recession.

Only Germany has bucked the trend, showing the lowest unemployment rate since unification, as the country's strong manufacturing sector drives exports.

"A positive interpretation of the December data was that it was the smallest drop in Eurozone unemployment since last April, and could be a sign that the labour market is stabilizing after a bout of sickness brought on by reduced Eurozone economic activity and weakened business confidence," Howard Archer, chief European economist at IHS Global Insight said in an email on Tuesday.

"However, it is notable that December’s increase followed a sharp rise of 114,000 in November and Eurozone unemployment still rose by 224,000 in the fourth quarter, so the underlying labour situation looks worrying."

Economic orthodoxy would suggest that deep cuts to public spending are incompatible with driving growth, but the latter imperative has begun to dominate the international agenda in the short term. Policymakers at the World Economic Forum in Davos made strong pronouncements over the weekend about their newfound focus on the subject, which were repeated at Monday's meeting.

"Last year European leaders had to take difficult and sometimes painful measures to stabilise the Eurozone, but as you all know, this was necessary - and we start seeing now that it was worth the effort," Herman Van Rompuy, the president of the European Council said on Monday evening.

"Yet we recognise that financial stability is in itself not enough to get out of the economic crisis. We must do more, in particular on economic growth and employment."

Van Rompuy said that creating jobs for young people, helping small- and medium-sized enterprises to get credit and deepening the single market could all help to drive growth.

Not everyone is convinced.

“The Council’s presentation of a strategy for growth is a strategy in name only being far too narrow in scope, too vague in commitments and too small in ambitions to have much impact,” Sony Kapoor, the managing director of Re-Define, the think tank, said in an email.

“Without a growth compact, a fiscal compact does nothing to tackle the Euro crisis. To the extent the fiscal compact may help increase support for tackling the eurocrisis amongst Germans and at the ECB, it may serve a useful role. In actual economic terms, it is largely irrelevant.”