Economy: 25 of 27 EU members agree on new fiscal treaty; China loses WTO appeal on rare earth dispute

Updated On: Jan 31, 2012

25 of the European Union's 27 member states have agreed to join a German-inspired fiscal treaty to enforce budget discipline. The Czech Republic and the United Kingdom refused to sign up. Meanwhile, the World Trade Organization's appeals body has upheld a ruling saying China restricted exports of nine raw materials, including rare earths, to protect its domestic manufacturers - breaking international trade rules.

Fiscal Pact

At a Monday summit in Brussels, leaders of 25 EU governments agreed on a historic pact to move to closer fiscal union and signed off on the details of a permanent bailout fund for the eurozone.

Of the 27 EU members, only the United Kingdom and the Czech Republic refused to sign the new deal by March. UK Prime Minister David Cameron had previously said he would not sign a treaty that threatened UK interests.

The Czechs cited "constitutional reasons" for their refusal.

The EU has existing rules that are supposed to limit budget deficits and government debt, but they have never been enforced. The new treaty will change this. Germany - the eurozone's biggest lender and most powerful economy - has been particularly keen to get a binding treaty adopted to enforce budget rules.

Under the new treaty, the European Court of Justice will be empowered to monitor compliance and impose fines on rule-breakers. The fines will be capped at 0.1 percent of gross domestic product.

The European Commission will play an enhanced role in scrutinising national budgets.

Governments will need to keep their budget deficits to an average of 0.5 percent of GDP over the economic cycle—and to reduce their total government debt toward 60 percent of GDP over time.

German Chancellor Angela Merkel told a news conference the agreements on the fiscal pact and a permanent rescue fund for the euro zone were a "small but fine step on the path to restoring confidence."


Many economists doubt the wisdom of so severely restricting deficit spending, and some EU diplomats believe the fiscal compact was mostly a political gesture to calm German voters angry at repeated euro zone bailouts and to restore market confidence.

"To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do," a British official said.

Germany had intended to include the new fiscal measures as a change to the EU treaty itself. British and now Czech refusal to sign means that the pact must be created as a separate agreement involving just some of the EU countries.

Ms. Merkel said that although UK Prime Minister Cameron has shown no sign of relenting in opposition to treaty change, the new pact could be easily slotted into EU law at a later date, perhaps within five years.

Greek Debt

Also at the summit, French President Nicolas Sarkozy said he expected a deal on reducing Greece's debt to private bondholders within days. He suggested the European Central Bank would help meet a funding gap.

Greek Prime Minister Lucas Papademos confirmed the news, saying negotiators had made "significant progress" in talks to strike a restructuring deal for his country's debt.

European Council President Herman Van Rompuy said a deal was needed this week to be finalized in time to avert a chaotic Greek default in mid-March, when it faces huge bond repayments.

Report: Europe signs up to German-led fiscal pact [Reuters, 30 Jan 2012]

Report: EU summit: UK and Czechs refuse to join fiscal compact [BBC, 31 Jan 2012]

Report: Europe Forges Closer Fiscal Ties [Wall Street Journal, 30 Jan 2012]

China Rare Earth Dispute

In other economic news, the World Trade Organisation's appeals body has upheld a ruling that China restricted exports of raw materials to protect its domestic manufacturers, breaking international trade rules.

China had appealed a WTO ruling in July that it broke global trade rules. The United States, European Union and Mexico had claimed that China's export block on minerals like magnesium and bauxite drove up prices.

The US, EU and Mexico argued the higher prices their manufacturers were forced to pay for goods such as bauxite, coke and zinc put them at a disadvantage across a wide swath of industries - from steel to batteries, chemicals and ceramics.

China said its export limits on nine raw materials, including some rare earths, were needed to protect the environment.

But the WTO appeals body said China must now "bring its export duty and export quota measures into conformity with its WTO obligations".

China's WTO mission in Geneva said it "deeply regrets" the decision, but promised that China would abide by the ruling.

In a statement, US Trade Representative Ron Kirk called the ruling "a tremendous victory for the US...particularly its manufacturers and workers".

The case highlights the global scramble to secure supplies of raw materials after huge swings in commodity prices over the past few years. It also represents an example of the US and the EU joining forces to confront China on trade matters.

Report: China loses WTO appeal over raw materials exports [BBC, 30 Jan 2012]

Report: WTO: China rare earth trade defies rules [CNN, 31 Jan 2012]

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