The Merkel-Sarkozy agreement on a fiscal union may survive, but it won't include Great Britain. Prime Minister David Cameron is adamantly opposed to the new rules that would give Brussels unprecedented power to approve national budgets and enforce rules governing budget deficits, as well as protocols that would strip the city of London of their pre-eminent role in the financial services sector.
Europe divided on Friday in a historic rift over building a closer fiscal union to preserve the euro, with an overwhelming majority of countries led by Germany and France agreeing to forge ahead with a separate treaty, leaving the EU's third biggest economy Britain isolated.
The outcome of a two-day European Union summit left financial markets uncertain whether and when more decisive action would be taken to stem a debt crisis that began in Greece, spread to Portugal, Ireland, Italy and Spain and now threatens France and even economic powerhouse Germany.
A new treaty could take three months to negotiate and may require referendums in some countries. Two ECB sources told Reuters the European Central Bank would keep purchases of euro zone government bonds capped for now and not take extra action. Debt markets were wary. Interbank lending rates eased but Italian 10-year bond yields remained around 6.5 percent.
Twenty-six of the 27 EU leaders agreed to pursue tighter integration with stricter budget discipline in the single currency area, but Britain said it could not accept proposed EU treaty amendments after failing to secure concessions.
Great Britain does not use the euro for currency so its agreement was not required. All 17 countries in the euro zone approved the general outline of the Merkozy measures and the measures will move forward as an intergovernmental agreement with hoped for passage by the entire EU sometime around March.
Cameron objected to a financial transactions tax that was part of the agreement. The big financial houses in London are opposed to the tax, believing it would affect their status as the financial services capitol of Europe. Cameron was also objecting to the radical dissolution of sovereignty that is inherent in the Merkozy agreement.
The EU is far from being out of the woods. Crucial negotiations remain with the rest of the EU that will probably water down the proposals governing sanctions against nations that don't follow the rules on budget deficits even more. It is unknown how the markets will react to an agreement with weak enforcement provisions but the fact that they are still negotiating has so far made the markets wary.