Box 2: The Brussels Euro Summit

On December 8-9, the 27 EU leaders gathered in Brussels for a summit with the key task of clinching a deal on how to tackle the eurozone crisis. The leaders attempted to address both the short-term challenges to stabilize the eurozone as well as longer-term challenge to strengthen fiscal and economic coordination in the greater EU area. Lacking unanimous support, most notably from the United Kingdom, the end result was a statement of agreement among 23 European countries, including all members of the eurozone. Other EU countries such as the Czech Republic, Hungary, and Sweden have indicated they will need to consult with their respective national parliaments before joining the agreement. Leaders intend to have the pact take effect by March 2012. The main components of the agreement include:

A New "Fiscal Compact"

The 23 leaders agreed to establish a "fiscal compact" through an intergovernmental treaty that essentially mandates greater fiscal coordination and budget discipline. The new fiscal rules require that member states maintain government budgets in balance or surplus. This provision will imply that, as a rule, the annual structural deficit does not exceed 0.5 percent of nominal GDP. In addition, the balanced budget rule must be written into the states’ constitutional laws and will be subject to an automatic correction mechanism should a member state deviate from the rule. The leaders also recognized the European Court of Justice’s jurisdiction to verify the incorporation of these provisions into domestic law. Furthermore, national budgets must be submitted to the European Commission. Any member in breach of the 3 percent of GDP deficit ceiling will also be subject to immediate automatic consequences unless a qualified majority is opposed.

Stabilization Tools

To address the urgent short-term needs of the euro area, the leaders agreed to "rapidly deploy" the leveraging of the EFSF as well as to accelerate the start date of the European Stability Mechanism treaty to July 2012 — one year earlier than the original July 2013 target. The leaders will review the adequacy of the current 500 billion euro ceiling on the mechanism in March and have also decided to keep the EFSF active until mid-2013, despite the operation of the ESM as a way of doubling the firepower available. And lastly, the member states are considering — and expected to confirm within 10 days — providing up to 200 billion euros in bilateral loans to the IMF to help the institution deal with the crisis.

In an effort to quell private-sector lenders’ fears, the leaders formally reaffirmed that the haircut decisions taken concerning Greece were an anomaly and that investors will not automatically face losses in the event of a future bailout.