Divisions over EU treaty threaten crisis solution

BERLIN — Plans by France and Germany to save the euro through closer European unity faced a serious challenge Tuesday from Britain, as deep divisions emerged between the 17 EU nations that use the euro and the 10 others that don’t.

Threatened by fears their joint currency may not survive, German Chancellor Angela Merkel and French President Nicolas Sarkozy have demanded changes to European Union treaties to tighten controls over spending and borrowing for all who use the embattled euro. But Britain, which doesn’t use the currency, has threatened to put the brakes on treaty changes, fearing they would force a greater transfer of power from London to Brussels and curb British influence in the EU.

Sarkozy’s and Merkel’s comments reinforced market expectations that EU leaders at a Friday summit will finally contain, through tighter financial rules, the 2-year-old debt crisis that has engulfed the continent and threatens the entire global economy.

Enter David Cameron, the prime minister of Britain who said he would be heading to the Brussels summit “to defend and promote British interests.”

“Eurozone countries do need to come together, do need to do more things together. If they choose to use the European treaty to do that, Britain will be insisting on some safeguards, too,” he declared Tuesday. “As long as we get those, then that treaty can go ahead. If we can’t get those, it won’t.”

Other non-euro members of the bloc have reacted with caution to the German-French demand for treaty changes, saying more details are needed about what they would entail.

Cameron is the leader of Britain’s Conservative party, which resists transferring more powers to EU institutions in Brussels. Many party members have long wanted to ditch the EU altogether, forcing Cameron to walk a narrow line. He must satisfy those who fear a loss of Britain’s sovereignty but also ensure that, while keeping Brussels at arm’s length, he doesn’t sacrifice London’s say in EU affairs.

The fear of losing influence with the 27-nation bloc is particularly acute since France and Germany have called for a tighter-knit club of the 17 eurozone nations with tough rules for national budgets and automatic sanctions for those who stray.

The safeguards cited by Cameron included the importance of keeping a single EU market of some 500 million consumers and making sure that any eurozone moves don’t threaten London’s status as a global financial center. For example, France has proposed a tax on financial transactions that Britain has forcefully opposed, fearing businesses will leave London if their cost of doing business goes up.

Cameron recognized that Britain had a huge vested interested in seeing the eurozone resolve its problems, since a significant amount of British exports go to fellow EU nations.

“The most important British interest right now is to sort out the problem in the eurozone that is having the chilling effect on our economy,” he said. He gave no other specifics.

Adding to the pressure, Standard &Poor’s warned it could downgrade 15 eurozone nations as well as Europe’s bailout fund, if European leaders don’t act. And U.S. Treasury chief Timothy Geithner began a three-day European tour on Tuesday to prod eurozone nations into action.

If the bailout fund, which has already rescued Ireland, Portugal and Greece, is downgraded, it could have to charge higher rates to lend to other countries in the future, making it tougher for them to recover. The bailout fund depends on the top Triple-A credit ratings of Germany and France.

Many have already dismissed the bailout fund as too small to rescue a country like Italy, the eurozone’s third-largest economy. Help from abroad also seemed unlikely — Geithner said the Federal Reserve has no plans to give money to the International Monetary Fund to bolster Europe’s bailout fund.

German Finance Minister Wolfgang Schaeuble said the S&P ratings warning may not be all bad, since it could spur action at the summit Friday billed as the meeting “to save the euro.”

“We take this assessment as further reassurance to do everything to achieve a good result on Dec. 9,” he said in Vienna.

Markets have been jittery because of fears that the euro might disintegrate, causing recessions in Europe and the United States and sending tremors through the entire global economy.

In recent days, investors have put huge faith in European leaders’ ability to produce a lasting plan to the crisis. Stock markets, bond markets for Italy and Spain, and the embattled euro all shrugged off the S&P’s downgrade threat. The euro bounced back Tuesday to $1.3413 — buoyed in part by a massive rebound in German industrial orders.

The reforms pushed by Merkel and Sarkozy will likely take months — if not years — to implement, but European leaders hope they will impress the European Central Bank or the International Monetary Fund enough to persuade one or both to step into the breach quickly with more financial aid.

The proposals included introducing an automatic penalty for any government that allows its deficit to exceed 3 percent of GDP; requiring countries to promise to balance their budgets; pledging that any future bailouts would not require private bond investors to absorb a part of the costs, as was the case for the Greek bailout; and reiterating a promise not to criticize the ECB.

While there is a sense that leaders are simply scrambling to come up with the formula that induces the ECB to act, Moritz Kraemer, S&P’s head of sovereign ratings for Europe, cautioned that central bank action just by itself would not save the AAA credit ratings of Germany, France and the bailout fund.

Kraemer told reporters Tuesday that a credible plan to solve the crisis also needed to be put in place. He noted that S&P’s warning targeted all eurozone countries — with the exception of two whose bonds are already rated very low — because the agency is concerned about a paralysis in European decision-making that cripples all of its economies, no matter how robust.

“The crisis in the eurozone has now reached a level that systemic stresses become more tangible and a bigger threat near-term,” he said. “It has become a crisis of eurozone governance and crisis management.”

———

Kirsten Grieshaber and Martin Crutsinger in Berlin, David Stringer in London, Raf Casert and Gabriele Steinhauser in Brussels contributed to this story.

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