By Jack Duffy and Peter Koh

BRUSSELS (MNI) — European leaders offered a clearer blueprint for
a tighter fiscal union at this week’s summit, but efforts to assemble
greater firepower to confront the Eurozone debt crisis fell short of the
European Central Bank bazooka that many had hoped for.

The plan that emerged on early Friday closely followed the road map
unveiled by French President Nicolas Sarkozy and German Chancellor
Angela Merkel on Monday.

As least 23 EU leaders agreed to submit to a new “fiscal compact”
of tough budget rules and automatic sanctions when deficits stray above
3% of GDP. The deal will also require states to submit draft budgets to
Brussels, which will have the power to call for revisions.

The “golden rule” of deficit control must also be embedded in
national constitutions with the European Court of Justice having the
authority to verify that national rules were implemented correctly.

But the refusal of the UK to go along with the plan brought
complications. Since institutions like the European Commission can only
have a formal role in agreements backed by all 27 EU countries, it was
unclear Friday who would enforce the new rules.

“From an institutional view it would have been much more simple if
we could have all member states agreeing”, Jose Manuel Barroso,
president of the European Commission, said Friday.

And despite the fast-track approval path agreed to by EU leaders,
voters in some countries might still have their say. Ireland’s Prime
Minster Enda Kenny said Friday that the new treaty will have to be
studied “forensically” to determine if a referendum was required.

Ireland’s minister for European affairs, Lucinda Creighton, said
the chances appeared to be “50-50″ that a referendum would be needed.

Although ECB President Mario Draghi gave the summit agreement a big
boost by calling the deal “a very good outcome for the euro area member
states,” it was clearly not the grand plan some leaders had hoped for.

Europe’s permanent bailout fund, the European Stability Mechanism,
will be launched as soon as July 2012, but Merkel vetoed plans to raise
the ESM’s lending limit above E500 billion, to allow it to operate in
conjunction with the E440 billion European Financial Stability Facility,
or to have a banking license so it could borrow from the ECB, as France
had proposed.

In a positive move for markets, the new ESM will drop the
principle, previously insisted upon by Germany, of private sector
involvement in debt restructurings. Leaders said the haircut being
imposed on Greek debt holders would not be repeated in future rescues.

“Our first approach to PSI, which had a very negative effect on the
debt markets, is now officially over,” European Council President Herman
Van Rompuy said.

And in getting central banks from EU member states to stump up E200
billion in loans to the International Monetary Fund, Eurozone leaders
also succeeded in drawing the fund into a more direct role in fighting
the debt crisis. But as Draghi pointed out at Thursday’s ECB press
conference, the loans must go into the IMF’s general resources and
cannot be earmarked specifically for the Eurozone.

But if the summit accord had one major weakness, analysts said, it
was that it did not answer the one question most on the minds of
Eurozone market observers: Will it prompt more aggressive support from
the ECB?

Draghi threw cold water on the idea at Thursday’s press conference
and nothing at the summit helped to raise such hopes.

“The ECB has still got room to step up its purchases to a
significant extent, but markets will remain concerned that it did not
commit to an enhanced role in resolving the crisis,” analysts at BNP
Paribas said in a research note. “Overall, this is not quite the bazooka
markets would have liked, but we are in a better position than we were
two weeks ago.”

–Brussels bureau: +324-9522-8374; jduffy@marketnews.com

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