26 EU nations move toward new treaty

French President Nicolas Sarkozy, left, shakes hands with Croatian Prime Minister Jadranka Kosor, right, during a group photo at an EU summit in Brussels, Dec. 9, 2011.
AP Photo/Yves Logghe

Last Updated 8:36 a.m. ET

All European Union states except Britain moved toward setting up a new treaty Friday, giving up crucial powers over their own budgets in an attempt to overcome a crippling debt crisis.

Who's in it?

  • All 17 countries that use the euro are definitely signing up. Nine non-euro states - Denmark, Latvia, Lithuania, Poland, Romania, Bulgaria, Hungary, Sweden and the Czech Republic - said they would consult their parliaments before joining in. In some of those countries, however, parliaments are less than enthusiastic.

Who's not in it?

Why did Europe need a new treaty?

  • For the past two years, the countries that share the euro have been rocked by a debt crisis that has recently threatened the survival of the common currency itself. Germany and France in particular argued that only tough rules enshrined in a treaty would convince markets that all countries will be able to repay their debts and a similar crisis will never happen again.

How will that be achieved?

  • Debt brakes in national constitutions, with countries committing to keep their deficits below 0.5 percent of economic output. That cap can only be broken in exceptional circumstances or to counteract a recession. The European Court of Justice will make sure all states' debt brakes are effective.
  • More automatic penalties for deficit sinners: It will be more difficult for countries to stop one of their partners from being punished for breaking the EU's debt and deficit rules. In the past, governments often protected their partners from being sanctioned.
  • All states have to tell their partners in advance how much debt they plan to take on through bond sales.

What else did they decide?

  • The eurozone, together with other willing EU states, will give as much as 200 billion euros to the International Monetary Fund, so that the IMF can help beef up the eurozone's firewalls.
  • The eurozone's new, permanent bailout fund, the European Stability Mechanism, will take over from the current rescue fund, the European Financial Stability Facility, one year ahead of schedule, in July 2012. Unlike the EFSF, a hastily set up private company owned by all eurozone states, the ESM is a permanent organization run by governments. It also has paid-in capital, similar to a bank, and is therefore more credible on financial markets.
  • Decision-making in the ESM was simplified in emergency situations, giving a majority of 85 percent of capital holders the power to decide on giving a struggling country a bailout. That is meant to stop small countries from blocking or slowing down urgent rescues, as has happened in the past.
  • The eurozone scaled back the rules to force banks and other private investors to take losses when a country gets a bailout from the ESM. The previous push to inflict losses on bondholders has been blamed for exacerbating the crisis.

What did they fail to agree on?

  • Eurozone leaders did not decide to boost the overall firepower of their own bailout funds, which is currently limited to euro500 billion. They promised to reconsider that cap in March, shortly before the ESM comes into force.
  • They did not give a clear signal that the European Central Bank will take on a bigger role in fighting the crisis by buying up bonds from struggling countries on a massive scale to keep their funding costs in check.
  • They did not agree to more intrusive powers for the European Commission over the fiscal policies of wayward states, as had been demanded by European Council President Herman Van Rompuy and some nations. Instead, they promised to "examine swiftly" much more lenient proposals from the Commission.
  • They did not allow the bailout funds to directly recapitalize failing banks. That could have prevented countries from taking on more debt when they have to bail out lenders.

Will it work?

  • Stock markets and the euro rose modestly in reaction to the deal, but many details remain to be worked out. Much will depend on whether the stricter fiscal rules can persuade the ECB to unleash massive funds to buy up bad eurozone debt.