BRUSSELS (Reuters) – EU officials laid out a new agreement to tighten fiscal rules for the euro zone and other participating EU countries on Friday, hoping to push ahead with deeper economic integration and get on top of the two-year-old debt crisis.

The eight-page draft agreement will be discussed by member states for the first time at a meeting in Brussels on Tuesday, with the aim of securing ratification from at least nine euro zone countries potentially by the end of January, a threshold that would bring the agreement into force as soon as March.

The deal — dubbed a new “fiscal compact” by European Central Bank chief Mario Draghi — was drafted after a summit on December 8-9, when all EU leaders, except Britain’s David Cameron, agreed that it was the right way forward.

While isolated in the immediate aftermath of the summit, Britain will be allowed to follow discussions on the new agreement as an “observer,” joining the other 26 EU countries as they negotiate the fine print of the deal.

“It’s quite clear: the UK will be there with observer status,” an EU official told reporters. “The UK said from the outset they didn’t want to get involved in this text, so they will be there, but as an observer for the whole process.”

The main aim of the agreement is to bind euro zone countries into tighter fiscal rules, including the need to keep their budget deficits below three percent of gross domestic product and their debt levels below 60 percent of GDP.

‘GOLDEN RULE’

BRUSSELS (Reuters) – It was billed as a summit to save the euro. It may be remembered as the day Europe lost patience with Britain, as most of the continent threw its lot in with EU founding members France and Germany and committed to binding their economies ever more tightly.

There was plenty of talk of history in the making in the week before the Dec 8/9 gathering of European Union leaders – the eighth this year. But it was all about the currency and whether it would survive the strains of a debt crisis that over the past two years has engulfed Greece, spread to Ireland, Portugal, Spain and Italy and now threatens France and even mighty Germany.

As the summit began, there was no hint of the drama that was to come in the early hours of Friday, the moment when Europe split, 26 against one, after about 10 hours of talks. Britain has always had an uneasy relationship with its EU partners, choosing not to join the single currency or sign the open borders Schengen treaty and often kicking against what it sees as Brussels “interference.”

But this was a low point. The first time in 39 years that a British prime minister had used a veto to block an EU agreement. David Cameron cast it is a bold and necessary decision to protect British interests. Most of the rest of Europe appeared to regard it as reckless and went a different way. Hours later, when the leaders briefly reconvened to finish their discussions, Cameron cut a lonely figure. French President Nicolas Sarkozy appeared to avoid an extended hand as Cameron walked to his seat.

The build up to this last summit of the year had been much like the previous seven. The language had been recognizable too, even if market pressures had added an unprecedented degree of urgency to glacial EU decision making. Overnight borrowing from the European Central Bank hit its highest level since March at the start of December, showing the degree of tension amongst banks.

PROFOUND CONCERN

U.S. Treasury Secretary Timothy Geithner had spent several days in Europe before the summit. The United States, like all of Europe’s trade partners, had been watching the accelerating debt crisis with profound concern, worried for their own economies and banks.

BRUSSELS, Dec 11 (Reuters) – It was billed as a summit to save the euro. It may be remembered as the day Europe lost patience with Britain, as most of the continent threw its lot in with EU founding members France and Germany and committed to binding their economies ever more tightly.

There was plenty of talk of history in the making in the week before the Dec 8/9 gathering of European Union leaders - the eighth this year. But it was all about the currency and whether it would survive the strains of a debt crisis that over the past two years has engulfed Greece, spread to Ireland, Portugal, Spain and Italy and now threatens France and even mighty Germany.

As the summit began, there was no hint of the drama that was to come in the early hours of Friday, the moment when Europe split, 26 against one, after about 10 hours of talks. Britain has always had an uneasy relationship with its EU partners, choosing not to join the single currency or sign the open borders Schengen treaty and often kicking against what it sees as Brussels “interference”.

But this was a low point. The first time in 39 years that a British prime minister had used a veto to block an EU agreement. David Cameron cast it is a bold and necessary decision to protect British interests. Most of the rest of Europe appeared to regard it as reckless and went a different way. Hours later, when the leaders briefly reconvened to finish their discussions, Cameron cut a lonely figure. French President Nicolas Sarkozy appeared to avoid an extended hand as Cameron walked to his seat.

The build up to this last summit of the year had been much like the previous seven. The language had been recognisable too, even if market pressures had added an unprecedented degree of urgency to glacial EU decision making. Overnight borrowing from the European Central Bank hit its highest level since March at the start of December, showing the degree of tension amongst banks.

PROFOUND CONCERN

U.S. Treasury Secretary Timothy Geithner had spent several days in Europe before the summit. The United States, like all of Europe’s trade partners, had been watching the accelerating debt crisis with profound concern, worried for their own economies and banks.

BRUSSELS, Dec 9 (Reuters) – Europe secured an historic agreement to draft a new treaty for deeper economic integration in the euro zone on Friday, but Britain, the region’s third largest economy, refused to join the other 26 countries in a fiscal union and was left isolated.

The outcome of a two-day European Union summit left financial markets uncertain whether and when more decisive action would be taken to stem a debt crisis that began in Greece in 2009, spread to Portugal, Ireland, Italy and Spain and now threatens France and even economic powerhouse Germany.

A new treaty could take three months to negotiate and may require loseable referendums in countries such as Ireland. While nine non-euro-zone countries said they would join the euro zone in backing it, there were quickly notes of caution from some corners, including the Czech Republic and Hungary.

Two ECB sources told Reuters the European Central Bank would keep purchases of euro zone government bonds capped for now and take no extra firefighting action. Debt markets were wary. Interbank lending rates eased but Italian 10-year bond yields rose to around 6.5 percent.

Under the new treaty plan, the leaders agreed to pursue a tougher budget discipline regime with automatic sanctions for deficit sinners in the single currency area, but Britain said it could not accept the proposed treaty amendments after failing to secure concessions for itself on financial regulation.

“This is a breakthrough to a union of stability,” German Chancellor Angela Merkel said. “We will use the crisis as a chance for a new beginning.”

After 10 hours of talks that ran into the early hours of Friday, Britain found itself without any allies around the table, diplomats said. All the other nine non-euro states said they wanted to take part in the fiscal union process, subject to parliamentary approval.

BRUSSELS, Dec 9 (Reuters) – European Union leaders sealed a new fiscal pact ensuring tougher budget discipline but failed to agree on a treaty change to enshrine the rules, meaning a deal may now involve the 17 euro zone nations plus any others that want to join, diplomats said.

An agreement involving all 27 EU members fell through - raising the prospect of a two-speed Europe – after British Prime Minister David Cameron demanded concessions that Germany and France were not willing to give, one of the officials said.

“We’ve always said we would do it at 17 if it didn’t work at 27. That’s what happened,” one senior EU diplomat told Reuters.

The EU leaders, meeting in Brussels, agreed on automatic sanctions for euro area deficit offenders unless three-quarters of states vote against the move, and approved a new fiscal rule on balanced budgets to be written into national constitutions.

“There is a deal between leaders on the new fiscal compact,” an EU official told reporters.

After nearly 10 hours of talks running into the early hours of Friday morning, they also decided that the currency bloc’s future permanent bailout fund, the ESM, would be capped at 500 billion euros, as Germany had insisted.

It will also not get a banking licence, which would have allowed it to draw on European Central Bank funds to increase its firepower, another move Germany objected to.

BRUSSELS (Reuters) – European Union leaders sealed a new fiscal pact ensuring tougher budget discipline but failed to agree on a treaty change to enshrine the rules, meaning a deal may now involve the 17 euro zone nations plus any others that want to join, diplomats said.

An agreement involving all 27 EU members fell through – raising the prospect of a two-speed Europe – after British Prime Minister David Cameron demanded concessions that Germany and France were not willing to give, one of the officials said.

“We’ve always said we would do it at 17 if it didn’t work at 27. That’s what happened,” one senior EU diplomat told Reuters.

The EU leaders, meeting in Brussels, agreed on automatic sanctions for euro area deficit offenders unless three-quarters of states vote against the move, and approved a new fiscal rule on balanced budgets to be written into national constitutions.

“There is a deal between leaders on the new fiscal compact,” an EU official told reporters.

After nearly 10 hours of talks running into the early hours of Friday morning, they also decided that the currency bloc’s future permanent bailout fund, the ESM, would be capped at 500 billion euros, as Germany had insisted.

It will also not get a banking licence, which would have allowed it to draw on European Central Bank funds to increase its firepower, another move Germany objected to.

BRUSSELS (Reuters) – European Union leaders agreed on new fiscal rules enshrining tougher budget discipline on Thursday, an EU official said, after the European Central Bank doused hopes of dramatic action on its part to arrest the euro area’s debt crisis.

The 27 EU leaders, meeting in Brussels, agreed on automatic sanctions for euro zone deficit offenders unless three-quarters of states vote against the move, and approved a new fiscal rule on balanced budgets to be written into national constitutions.

“There is a deal between leaders on the new fiscal compact,” an EU official told reporters after four hours of talks.

However, they were still debating how to strengthen their future permanent rescue fund and whether to give it a banking license, and had not yet broached the vexed question of whether the new pact requires major changes to the EU treaty.

European Council President Herman Van Rompuy, the summit chairman, wants all 27 EU states to agree to the rule changes via a minor adjustment to a treaty protocol that could be implemented quickly without requiring full ratification. But German Chancellor Angela Merkel demanded a fully fledged treaty change to give the measures extra weight.

“The Germans are obsessed with how we are going to do things, saying we have to change the treaty. They are totally obsessed. That’s why it can get difficult,” an EU diplomat said.

ECB President Mario Draghi earlier spooked financial markets by discouraging expectations that the bank would massively step up buying of government bonds if EU leaders agreed on moves towards closer fiscal union.

BRUSSELS, Dec 8 (Reuters) – EU leaders are committed to a new “fiscal compact” for the euro zone, including much tighter control of public finances and, in the longer term, could consider joint debt issuance, an early draft of conclusions at an EU summit said on Thursday.

Key elements were, however, immediately rejected by Germany.

“The stability and integrity of the Economic and Monetary Union and of the European Union as a whole require the swift and vigorous implementation of the measures already agreed as well as further qualitative moves towards a genuine ‘fiscal union’ in the Euro area,” said the draft obtained by Reuters.

The draft showed the euro zone agreed to bring forward the launch of its permanent bailout fund, the European Stability Mechanism, to July 2012, and give it a banking licence.

The draft also said that both the temporary bailout fund, the European Financial Stability Facility (EFSF) and the ESM, could run in parallel for a year from mid-2012.

The maximum lending capacity of the ESM, set at 500 billion euros, would not be diminished by the amount of money already spent by the EFSF, as was the initial plan, the draft said.

But Germany opposed proposals such as giving the ESM a banking licence, issuance of common euro zone debt and allowing the parallel functioning of the EFSF and ESM, a senior German source said.

BRUSSELS (Reuters) – Denmark is prepared to back EU treaty change if it helps resolve the euro zone debt crisis, but everyone will have to compromise and all 27 EU countries need to be on board for it to succeed, Prime Minister Helle Thorning-Schmidt said on Thursday.

With Denmark taking over the EU’s rotating presidency for six months from January 1, Thorning-Schmidt said she was sharply conscious of the responsibility Denmark faced in tackling the region’s problems, despite being outside the euro zone.

While she has an ambitious agenda that ranges from energy policy to telecoms regulation and securing the EU’s external borders, she acknowledged that treaty change and the economic crisis were likely to dominate the presidency.

“We have not always been convinced that treaty change was the right path because it tends to take a very long time,” she told Reuters in an interview, shortly before EU leaders began a summit to discuss ways of resolving the debt crisis.

“But the Danish government is now seeing treaty change as perhaps part of the solution to this problem and the lack of discipline within the euro zone, and therefore we come with a very open mind.

“I want to urge the other member states to be flexible in seeking a compromise… and to do their utmost to keep the 27 member states together. It’s very important that, at a time of crisis, we stick to the 27 member states.”

Germany and France are pushing to change the EU treaty to tighten budget deficit and debt rules for the 17 euro zone countries in the hope of better insulating the currency area from the debt crisis.

FRANKFURT/BRUSSELS (Reuters) – The European Central Bank acted to soften a looming recession and avert a credit crunch by cutting interest rates and offering banks long-term funds on Thursday but spooked markets by dousing hopes of dramatic crisis-fighting action in the euro area.

ECB President Mario Draghi discouraged expectations that the bank would massively step up buying of government bonds if European Union leaders, gathering in Brussels for a crucial summit, agree on moves towards closer fiscal union.

He said the euro zone’s rescue fund should remain the main tool to fight bond market contagion, despite its clear limits, and said it was illegal for the ECB or national central banks to lend money to the IMF to buy euro zone bonds, appearing to veto one firefighting option under active consideration.

To counter that, Draghi announced unprecedented action to support Europe’s cash-starved banks with three-year liquidity and cut interest rates back to a record low 1.0 percent.

The euro and European shares dived as markets, increasingly convinced that only the ECB has the power to protect the euro zone, focused on what Draghi was cool about rather than the measures he announced.

“One step forward, two steps back,” said Alan Clarke, UK and euro zone economist at Scotia Capital. “The euro zone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping.”

The ECB cut its main rate by a quarter-point and flagged a strong chance of recession next year. Draghi admitted the central bankers had been divided even on that decision.