|EU leaders pledged support for a "limited" rewrite of the bloc's main treaty [AFP]
EU leaders have agreed on tougher rules for nations whose overspending threatens Europe's single currency and risks triggering another financial crisis.
Herman Van Rompuy, the EU president, said on Friday that the bloc was planning for a "robust and credible permanent crisis mechanism to safeguard the stability of the euro zone as a whole".
The point of the economic governance measures was to "deter bad budgetary behaviour by fining countries that run excessive deficits and debts much earlier than now. Also their budgets will come under review by the EU", he said.
Van Rompuy said leaders at the EU summit that got under way in Brussels on Thursday also agreed on a crisis mechanism to safeguard the stability of the eurozone, but that details need to be worked in the months ahead, notably on whether to bring in private creditors to ease the burden for taxpayers.
The crisis mechanism will be a safety net to prevent another debt crisis such as the one that gripped the eurozone this year when Greece nearly defaulted.
"When the euro as a whole gets into danger, EU states will be allowed to intervene but only under strict conditions," Angela Merkel, Germany's chancellor, said.
EU treaty changes
Van Rompuy said he would see in the months ahead if the tougher budget rules could be put into the EU treaty without requiring a major rewrite.
Diplomats said a simple tweaking of the Lisbon treaty could avoid the need for national referendums.
That is important because getting approval for the current EU treaty from 27 governments took 10 years, after Dutch and French voters killed an earlier version in 2005. Irish voters have also repeatedly dismissed treaty amendments.
Meghnad Desai, an economist and a member of the UK's House of Lords, told Al Jazeera that changing some clauses in the treaty is going to prove very controversial.
"If the treaty has to be revised, it will have to go through a referendum in many countries," he said.
"The EU may manage to do something without a treaty change but that would have less of a power. There is a lot of discussion to be had before we get a foolproof mechanism.
"They have set up a large fund ... but if a country looks like it is applying for the fund, it will cause so much mayhem on the stock market for that country's debt that no one will want to ask for the money. It's really a kind of Catch-22 situation."
Desai further said the "emergency fund, which expires in three years, will be kicked into renewal without anybody raising any stricter conditions. While Germany and France want to drive it, they can't agree what to do".
Merkel said she wanted to make it clear that a policy that threatens the euro as a whole also rattles the fundamental values of the EU.
She suggested undermining those values by running excessive deficits and debts should cost offenders their voting rights.
However, Manuel Barroso, the European Commission president, called losing voting rights "unacceptable", saying it would never get approval from all 27 EU governments.
This view was echoed by several European leaders and EU officials.
"If a country looks like it is applying for the fund, it will cause so much mayhem on the stock market for that country's debt that no one will want to ask for the money."
economist and member of UK's House of Lords
"That is a non-flier. That would create problems for many countries," Fredrik Reinfeldt, the Swedish prime minister, said.
Mark Rutte, the Dutch prime minister, said EU leaders had little choice but to bow to Germany's demands for treaty change.
"I think it's was more Mrs Merkel's proposition because of the constitutional court. That's the main reason," Rutte said.
"The constitutional issue of Germany, they need a small treaty change to implement a crisis mechanism."
Merkel and Nicolas Sarkozy, the French president, came to the two-day summit seeking a system which would force private creditors to bear some of the cost of bailing out a highly indebted country and not dump all the pain on taxpayers.
Merkel, for her part, said any rescue system should include "banks and funds who primarily benefit from high interest rates. That means that the taxpayer no longer carries the whole responsibility".
Some analysts are not convinced that such a task is achievable, however.
Meanwhile, David Cameron, the UK prime minister, won support for his battle against a 5.9 per cent rise in the EU budget.
A total of 10 nations backed Cameron's bid to limit the budget increase to 2.9 per cent - a rise that would still cost taxpayers in UK about £435m [nearly $700m].
The debt crisis that has gripped Greece and Ireland, and to a lesser extent Portugal and Spain, has left the 16-nation eurozone scrambling for stricter enforcement of rules aimed at keeping governments from running big deficits and undermining the shared currency.
Greece needed a rescue loan to avoid bankruptcy earlier this year, a crisis that sent shock waves through the currency union.
Even before the financial crisis of 2008, many EU countries broke limits on deficits and public debt of three per cent and 60 per cent of GDP respectively.
Existing provisions to punish overspending governments were never enforced as EU governments lacked the political will to punish fellow members of the bloc.
Caps on deficits are needed because overspending can undermine the euro.