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Britain Veto EU Summit Lisbon Treaty Changes

The EU summit in Brussels is taking centre stage today as the heads of states try to agree on a resuscitation plan that involves closer-knit fiscal union. The main policy changes include a permanent bailout fund, the European Stability Mechanism, which will take effect in July 2012. The ESM will be capped at €500 billion and will be controlled by the European Central Bank. Euro-states will be forced to keep their annual structural deficit of below 0.5% of GDP. If a member state breaches the 3% deficit ceiling there will be automatic penalty sanctions unless the majority of Euro-states agree against it. Euro area and other EU states will provide €200 billion in the form of bilateral loans to help deal with the crisis (this would allow increased bond purchases without breaking the ECB’s independency laws).

Britain has vetoed the proposals, with Prime Minister David Cameron claiming to be protecting the best interest of the UK: “I said before I came to Brussels that if I couldn’t get adequate safeguards for Britain in a new European treaty then I wouldn’t agree to it. What is on offer isn’t in Britain’s interests so I didn’t agree to it.”

Cameron had tried to pass a series of safeguards to protect the City of London Finance sector, but they were all successfully blocked by France: Any transfer of power from a national regulator to an EU regulator on financial services would be subject to a veto: Banks should face a higher capital requirement: The European Banking Authority should remain in London (there were suggestions that it might be consolidated in the European Security and Markets Authority in Paris): The European Central Bank be rebuffed in its attempts to rule that euro-denominated transactions take place within the Eurozone.

As a result of Britain’s decision the 17 Eurozone states plus 7 other EU members (Sweden, Czech Republic and Hungary joined the UK in opting out of the treaty revisions) are looking to forge a separate deal outside of the union’s core architecture, with the potential consequence of a two-speed Europe.

A senior EU diplomat was reported as saying: Cameron was clumsy in his manoeuvring,” on the assumption that isolation could have profound impacts on the British economy if Euro markets are subjected to financial regulation that Britain has no say on.

ECB President Mario Draghi called the proposals a step in the right direction for the Euro: “It’s going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members.” German Chancellor Angela Merkel was very satisfied with the decisions and applauded the fact that “lousy compromises,” were avoided.

Although EU leaders are basking in an air of optimism the markets do not seem so satisfied; many had hoped for more affirmative action and have flown to the safe-haven US Dollar and Japanese Yen from the Euro. The pound has also benefitted from its increased stance outside of the Eurozone crisis coupled with some unexpected positive data released today. The UK Producer Price Index Input rose by 13.4% on the year, PPI Output grew by 5.4% on the year and UK Goods Trade Balance deficit dropped from £10.175 billion to £7.557 billion from September to October.

The Pound to Euro exchange rate is currently 1.171, largely unchanged from yesterday and the Pound to US Dollar exchange rate is currently 1.570, showing a 0.50% increase today. Both the Pound and the Dollar look to benefit from the EU summit unless stronger, more impactful measures are brought in today.

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