Europe Moves Ahead With Fiscal Union, UK Isolated

Europe divided on Friday in a historic rift over building a fiscal union to preserve the euro, with a large majority of countries led by Germany and France agreeing to move ahead with a separate treaty, leaving Britain isolated.

Twenty-three of the 27 leaders agreed to pursue tighter integration with stricter budget rules for the single currency area, but Britain said it could not accept proposed amendments to the EU treaty after failing to secure concessions for itself.

After 10 hours of talks, all 17 members of the euro zone and six countries that aspire to join resolved to negotiate a new agreement alongside the EU treaty with a tougher deficit and debt regime to insulate the euro zone against the debt crisis.

"Not Europe, Brits divided. And they are outside of decision making. Europe is united," Lithuanian President Dalia Grybauskaite said in blunt English on arriving for the second day of the bloc's eighth crisis summit this year.

European Central Bank President Mario Draghi called the decision a step forward for the stricter budget rules he has said are necessary if the 17-nation euro zone is to emerge stronger from two years of market turmoil.

"It's going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members," Draghi said. "We came to conclusions that will have to be fleshed out more in the coming days."

German Chancellor Angela Merkel said she was very satisfied with the decisions. The world would see that Europe had learned from its mistakes and avoided "lousy compromise", she said.

Merkel, Europe's most powerful leader, said she had not given up hope that Britain would eventually agree to change the EU treaty to anchor stricter budget discipline.

Active ECB support will be vital in the coming days. Irish Europe Minister Lucinda Creighton said Dublin and many other member states expect the central bank to take a more pro-active approach to the debt crisis in the weeks ahead. Traders said the ECB bought Italian bonds on Friday to steady markets.

The euro, shares and commodities fell in Asia because of growing doubts about whether Europe can forge a convincing financial firewall to arrest contagion in bond markets, but the currency regained ground in Europe and European stocks were narrowly higher.

"Markets need to know where we are going, how we're getting there, and they need to know how long it's going to take. Where we are going, I believe, is toward a more unified and serious Europe in budgetary terms," said Francois Perol, chief executive of BPCE, France's second largest bank.

Asked if the euro was safe now, Polish Prime Minister Donald Tusk said: "I'm not sure."

In the run-up to the summit, Draghi's use of the term "fiscal compact" had spurred hopes that the ECB would be prepared to engage in massive buying of bonds from distressed euro zone states, an interpretation he discouraged on Thursday.

German Chancellor Angela Merkel and French President Nicolas Sarkozy had wanted to get the whole EU to agree to change the Lisbon treaty so that stricter budget and debt rules for eurozone states could be enshrined in the bloc's basic law.

(Reuters)