EU Leaders Commit to New 'Fiscal Compact': Draft


EU leaders are committed to a new "fiscal compact" for the euro zone, including much tighter budget deficit rules and debt issuance procedures, draft conclusions from a summit of EU heads of state showed on Thursday.

The draft, obtained by Reuters, also showed that the euro zone plans to bring forward the introduction of its permanent bailout fund, the European Stability Mechanism, to July 2012, and give the facility a banking license.

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Such a move would give the ESM access to European Central Bank liquidity, bolstering its ability to tackle the euro zone debt crisis. The draft conclusions also said the ESM should have the ability to directly recapitalize banks.

"The European Council is determined to preserve the integrity of the EU and the coherence between the euro area and the EU as a whole," the draft conclusions read.

"With this overriding objective in mind, and fully determined to overcome together the current difficulties, we agreed today on a new "fiscal compact" and on significantly stronger coordination of economic policies in areas of common interest.

"General government budgets shall in principle be balanced. Member states may incur deficits only to take into account the budgetary impact of the economic cycle or in case of exceptional economic circumstances," it said, adding that the structural deficit limit would be 0.5 percent of GDP.

On the ESM, which the draft said would have a capacity of 500 billion euros, the leaders agreed:

"Our common objective is for the ESM to enter into force in July 2012... The ESM will have the possibility to directly recapitalize banking institutions and to have itself the necessary features of a credit institution."

It said the existing bailout fund, the EFSF, would continue to operate until mid-2013.