Europe agrees new fiscal union treaty – without UK

Twenty-three of the European Union's 27 members have agreed to back a new treaty to establish closer economic union—with the notable exception of the UK.

After 10 hours of talks, Reuters reported, all 17 countries that use the single currency and six others decided to negotiate a new agreement that will sit alongside the existing EU treaty.

The UK said it would not accept the agreement; Hungary, Sweden and the Czech Republic said they had to consult their national parliaments.

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According to an EU statement, the new accord will contain strict limits on how much debt and deficit its signatories are allowed:

General government budgets shall be balanced or in surplus; this principle shall be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of nominal GDP.

There will be penalties if governments fail to respect this rule, the EU said.

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British Prime Minister David Cameron said it was "not in Britain's interests" to join the agreement.

The UK was pushing for a series of measures that would protect the City of London as Europe's financial hub, reported the Guardian, notably that an transfer of power over financial services from national to EU regulators be subject to veto; banks should have a higher capital requirement; and the European Banking Authority should remain in London.

But French President Nicolas Sarkozy said the rest of Europe could not accept the UK's demand for what he described as "a protocol to exonerate the UK from financial services regulation."

Cameron's decision will "transform Britain's relations within the EU," the Guardian said, pointing out that this is "the first time since Britain joined in 1973 that a treaty that strikes at the heart of the workings of the EU will be agreed without a British signature."

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France and Germany had sought a rewrite of the EU treaty itself, but that was made impossible by Britain's veto. German Chancellor Angela Merkel said she was "very satisfied" with the alternative treaty, Reuters reported, but added that she still hoped Britain would eventually agree to be part of fiscal union.

European Central Bank president Mario Draghi welcomed the agreement, reported the Financial Times, hailing it as "the basis for a good fiscal compact and more discipline in economic policy in the euro area members."

Since the agreement is not an EU treaty but a pact between governments, it will be quicker to set up—but possibly less binding, said the BBC.

The biggest question is how the accord will be enforced. EU institutions, including its court and commission, are legally prevented from regulating any agreement outside the EU treaties themselves, the FT pointed out.

Discussions to finalize the details of the agreement are due to resume shortly, according to the BBC. The pact is expected to be ready for signing by March 2012.

EU leaders also agreed short-term measures to tackle the European debt crisis, reported the Associated Press, including up to €200 million of funding for the International Monetary Fund contributed by euro-zone members and some non-euro countries, including the UK.

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