EU treaty strong on future, weak on current issues

The EU finally acted to solve its financial crisis with a new treaty that will require nations to balance budgets. The treaty has also created a split within the European Union, as the U.K. and several other nations opted out of the agreement.

European markets were up only slightly on news of the deal, indicating investor concern about issues unresolved by the new treaty.

U.K. rejects deal to rescue euro
What the European summit must accomplish

The treaty requires nations to keep deficits below 0.5 percent of economic output. That cap can only be broken in extraordinary circumstances or to counteract a recession. It also sets automatic penalties for non-complying nations. Nations will also have to tell their partners in advance how much debt they plan to take on through bond sales.

The treaty was signed by the 17 nations use the euro, plus six nations which are expected to adopt the currency: Denmark, Latvia, Lithuania, Poland, Romania and Bulgaria. The U.K. and Hungary -- which is on the verge of insolvency -- both opted out of the agreement. Sweden and the Czech Republic didn't sign but left the door open for signing the treaty at some point in the future.

The signers also agreed to give as much as $267 billion to the International Monetary Fund to help strengthen the Europe's firewalls against cascading defaults and set up a new, permanent European bailout fund. The new fund - called the European Stability Mechanism (ESM) - will be able to act quickly and will not automatically force banks and other private investors to take losses when a country gets a bailout.

While the treaty does put in place mechanisms for dealing with future debt problems, it doesn't resolve those facing a number of EU nations, most notably Italy and Spain. Italian bond yields are up today while Spain's are flat.

The treaty does not say the European Central Bank will be allowed to buy large amounts of bonds from struggling nations. Nor does it give more power to the European Commission, nominally the EU's governing body and one that has earned a reputation for extreme bureaucratic dysfunction.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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