Europe moves ahead with fiscal union, UK isolated

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 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 risky referendums in countries such as Ireland.

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.

Twenty-six of the 27 EU 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 proposed EU treaty amendments after failing to secure concessions for itself.

"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, all 17 members of the euro zone and nine of the 10 outsiders resolved to negotiate a new agreement alongside the EU treaty.

Britain's few allies melted away in the Brussels dawn. All the other nine non-euro states said they wanted to take part in the fiscal union process, subject to parliamentary approval.

The rift, which could widen into a permanent divide between London and the continental mainland, occurred 20 years to the day after European leaders agreed at the Maastricht summit to create the single currency, with Britain opting to stay out.

Prime Minister David Cameron insisted at a news conference that it remained in Britain's interest to stay in the EU and take advantage of its single market.

One senior EU diplomat called Cameron's negotiating tactics "clumsy". Among other things, he had sought a veto on a proposed financial transaction tax, which may now be voted through by a majority over the objections of the City of London financial centre.

Continue reading - Reuters - Europe moves ahead with fiscal union, UK isolated