EU agrees on fiscal treaty, minus Britain and 3 others

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REPORTING FROM LONDON -- The leaders of 23 European countries agreed early Friday to bind their nations together in a pact to limit government spending and borrowing but failed to persuade Britain to sign up, dealing a blow to European unity.

The agreement came after marathon talks in Brussels at a two-day summit billed as the last chance to rescue the euro from the debt crisis that threatens the single currency’s survival. Leaders from 23 European Union countries said they would harmonize their fiscal policies by putting caps on government debt and deficits and slapping sanctions on nations that break the rules.

But four of the EU’s 27 member states declined to join the new treaty, chief among them Britain, whose leader, Prime Minister David Cameron, said it would run counter to British national interests. Cameron had insisted beforehand that he would sign up only if he could win special exemptions for London’s crucial financial services industry from European regulations, such as a proposed financial transactions tax. The other countries, led by France and Germany, refused to grant that concession.

Hungary, Sweden and the Czech Republic also decided to stay out of the treaty, at least for now. Like Britain, those three countries maintain their own currencies and do not use the euro.

[Updated at 6:44 a.m. Dec. 9: A statement issued later by the Eurozone suggested that Hungary, Sweden and the Czech Republic were open to signing the new treaty after more national deliberation, leaving Britain as the lone EU country to reject the pact completely.]

The failure to secure unanimous approval for the pact exposes and exacerbates the divisions within the EU. Britain’s relationship with the EU has always been fraught with tension; that now looks likely to increase.

The chief backers of the new treaty, Berlin and Paris, say new fiscal discipline is imperative to put the euro on a sounder footing and avoid debt crises in the future. Analysts say the agreement could also free the European Central Bank to intervene more aggressively to prop up debt-saddled nations such as Spain and Italy, which are finding it increasingly expensive to borrow money in the financial markets because of a loss of investor confidence in their ability to pay it back.

Besides the fiscal pact, leaders agreed to speed up establishment of a permanent European bailout fund worth about $665 billion, to be set up next year instead of 2013. That war chest will operate in parallel with a temporary fund already worth $585 billion. Leaders also pledged to contribute an additional $266 billion to the International Monetary Fund that would go toward protecting countries threatened by the debt crisis.

The summit continues Friday, with the 23 nations in the new pact expected to hammer out details of how the agreement will be enforced.

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-- Henry Chu