This article titled “Germany to set the terms for saving the euro” was written by Ian Traynor in Brussels, for The Guardian on Tuesday 31st January 2012 00.58 UTC

Germany’s campaign to set the terms for saving the euro was crowned with success when EU leaders sealed agreement on a new “fiscal compact” for the single currency zone, enshrining Berlin’s insistence on rigour and discipline and establishing a new punitive regime for budgetary profligacy.

Chancellor Angela Merkel returned to Berlin with the new treaty in the bag, but also appeared more isolated in Europe in her hard line on Greece and how to save the country from defaulting on its debt.

All EU countries except Britain and the Czech Republic signed up for the new pact on Monday night, although Poland and France sparred over who would be allowed to take part in the twice-a-year eurozone summits which are a feature of the new regime.

President Nicolas Sarkozy sought to restrict the summitry to the 17 countries of the eurozone, while the Polish prime minister, Donald Tusk, insisted that non-euro countries who sign up to the new pact should be allowed to attend.

“It’s very symbolic,” said a senior EU diplomat. “A matter of national flags and national pride for the Poles.”

At German insistence, the treaty for the first time empowers the European Court of Justice as the enforcer of fiscal rectitude in the eurozone, makes it possible to levy quasi-automatic fines against countries in persistent breach of the new rules, and obliges all eurozone countries to introduce binding legislation or constitutional amendments abolishing governments’ rights to run up excessive levels of national debt.

“The debt brakes will be binding and valid forever,” said Merkel.

“Never will you be able to change them through a parliamentary majority.”

While the impact of the treaty will not be felt in the short term and will have little quick effect on Greece’s plight or on Europe’s sovereign debt crisis, Berlin insists it is needed to resolve the fundamental issue of excessive indebtedness in part of the eurozone, that it will prevent a rerun of the current crisis, and that it should have a calming effect in the bond markets.

While the rest of Europe reluctantly bowed to the German agenda, Berlin, however, found itself increasingly alone on how to fix Greece.

Anger in Athens over leaked German plans last week that Greece should surrender power over its budget to the EU since it was incapable of delivering on its bailout pledges mushroomed into strong criticism from some of Berlin’s habitual allies.

Helle Thorning-Schmidt, the Danish prime minister who has just taken over the EU presidency, said that Brussels would defend Greece against any assault on its democracy, a reference to the German demand for Athens to forfeit control over budget policy.

The Austrian chancellor, Werner Faymann, who has been on the German side of the creditor-debtor argument for the past 18 months, was also critical of Berlin.

Jean Asselborn, Luxembourg’s foreign minister, went further. “It’s not in order that German politicians say that we need commissars and that Greece be put under supervision … The biggest country in the EU, Germany, should be more careful.”

Merkel beat a hasty retreat from the German demands for a takeover of the Greek budget, declaring that “we are holding a discussion that we should not be holding … We don’t want a controversial discussion but one that is successful, successful for the people of Greece.”

Despite being the most pressing issue facing the EU, Greece was kept off the agenda of the summit which, apart from finalising the fiscal pact, largely focused on a debate about how to create jobs and stimulate growth in the EU while simultaneously engaging in savage spending cuts and ruling out any public spending on soaring unemployment levels.

A small group of EU leaders, however, ended the summit with a private meeting with the Greek prime minister.

EU leaders are waiting for a report on Greece’s compliance with the terms of its bailout – expected to be highly critical – from the European Commission, European Central Bank, and International Monetary Fund before deciding what to do about a second €130bn bailout which needs to be launched in March to avoid a Greek default.

Acquiescence to Berlin on the new stiff fiscal rules may make it easier to come up with more help for Greece, as well as increasing the firewall of bailout funds intended to stabilise the euro and ward off the risk of contagion from Greece to Italy and Spain.

The view in Brussels and other EU capitals is that Merkel needs the new euro regime to demonstrate to German public opinion and parliament in Berlin that the rest of the eurozone has adopted sound and strict rules before she can countenance increased aid for Greece.

She is also keen to get the new system established before the decisive round of the French presidential elections in May since the leftwinger, François Hollande, has pledged to renegotiate the pact while outlining public spending plans that could put France in breach of the rules.

A Hollande victory could yet upset the calculations in Berlin as France will not be able to ratify the new deal in time. before the presidential contest is settled.

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