EU, Without Britain, Moves Towards Fiscal Deal

Up to 26 European Union countries will finalize a pact to enforce budget discipline more strictly in the euro zone by March, a top official said on Tuesday, as the bloc tries to move quickly to rebuild confidence but without Britain's backing.

European Council President Herman Van Rompuy expressed disappointment that Britain had shunned an agreement reached at an EU summit last week to pursue fiscal integration as part of efforts to tackle the debt crisis, but made clear the door would remain open for London.

"They recognize the euro is a common good," Van Rompuy said in a speech to the European Parliament in Strasbourg, commenting on those in the agreement. "Then, early March at the latest, this fiscal compact treaty will be signed."

The 'fiscal compact' is meant to allow closer scrutiny of countries' spending to stop a similar debt crisis recurring and potentially making it more palatable for the European Central Bank to step up its purchases of distressed euro zone debt to hold down borrowing costs.

The euro fell to an 11-month low around 1.3060 at 1600 GMT on Tuesday after German Chancellor Angela Merkel was quoted as telling a closed-door meeting of her conservative lawmakers she rejected any suggestion of raising the ceiling on Europe's future bailout fund, according to participants.

"Any hope of more money that is stifled triggers such a strong market reaction at the moment," a Frankfurt stock exchange trader said.

Merkel was responding to Van Rompuy's comment in parliament that a review of whether the 500 billion euro limit on the planned European Stability Mechanism was adequate would be completed in March.

Britain refused to agree to changes to the EU's fundamental law, the Lisbon treaty, to push tougher budget rules in the euro zone after it was unable to win a veto to protect its financial services industry against laws from Brussels.

British Prime Minister David Cameron's demand drew criticism from European Commission President Jose Manuel Barroso, who said any such concessions would have damaged the EU's single market, which guarantees free movement of people, capital, goods and services.

"The United Kingdom, in exchange for giving its agreement, asked for a specific protocol on financial services which, as presented, was a risk to the integrity of the internal market," Barroso told parliament. "This made compromise impossible."

NO DISCRIMINATION

Worried about being dictated to by a euro zone moving towards centralized control of national budgets, Cameron rejected treaty changes to try to maintain its influence, but now appears isolated.

"To use a British expression, when you are invited to the table, you are either a guest or you're on the menu," said Guy Verhofstadt, the leader of the alliance of liberals in the European parliament, to loud applause.

Van Rompuy took a more conciliatory tone and sought to calm British fears of being sidelined in the future framework.

"This will not be the start of discrimination," he said. "At some stage, we will be 27 around the table and will be able to hammer out something which we were unable to agree on just a few days ago."

Many politicians and analysts believe Britain's decision will reduce its influence in shaping financial regulation, because the 26 other states that sign up to a new fiscal regime will meet more regularly and set the agenda.

"While formally Britain will still have on vote on financial regulation, its voice in the discussions deciding the direction of regulation will be weaker than the others," said Sony Kapoor, managing director of Re-Define, an economic think tank.

Still, in a sign of the emotions the question raises in Britain, Nigel Farage, a eurosceptic member of the European Parliament and leader of the UK Independence Party, said it was time for London to cut its ties with the EU altogether.

"Britain is going to make the great escape," he said. "You've decided to head off on the Titanic towards economic and democratic disaster and we are now in a life boat."

Several non-euro zone countries, including Sweden, Hungary and the Czech Republic, still need parliamentary approval before they can give their full backing to the move towards a fiscal compact.

Diplomats say this is largely a formality, but euro zone assets have lost ground since the summit, reflecting investor disappointment that leaders failed to agree more immediate steps for tackling the crisis.

The euro zone rescue fund sold 1.97 billion euros of three-month bills on Tuesday in an auction that met solid demand as investors sought safety in top-rated, short-dated paper.

However, analysts said the threat of a ratings downgrade of euro zone countries meant any attempt by the fund to raise long-term funds could prove much more difficult.