EU agrees tougher budget, debt rules

European Union leaders agreed on new fiscal rules enshrining tougher budget discipline, an EU official said, after the European Central Bank doused hopes of dramatic action on its part to arrest the euro area's debt crisis.

The 27 EU leaders, meeting in Brussels, agreed on automatic sanctions for euro zone deficit offenders unless three-quarters of states vote against the move, and approved a new fiscal rule on balanced budgets to be written into national constitutions.

"There is a deal between leaders on the new fiscal compact," an EU official told reporters after four hours of talks.

However, they were still debating how to strengthen their future permanent rescue fund and whether to give it a banking licence, and had not yet broached the vexed question of whether the new pact requires major changes to the EU treaty.

European Council President Herman Van Rompuy, the summit chairman, wants all 27 EU states to agree to the rule changes via a minor adjustment to a treaty protocol that could be implemented quickly without requiring full ratification. But German Chancellor Angela Merkel demanded a fully fledged treaty change to give the measures extra weight.

"The Germans are obsessed with how we are going to do things, saying we have to change the treaty. They are totally obsessed. That's why it can get difficult," an EU diplomat said.

European leaders met in Brussels in the first day of a summit in hopes of solving the financial crisis which has rocked the eurozone for over three months.

The Heads and Chiefs of State held an informal dinner ahead of tomorrow’s discussions, although they were expected to debate proposals. There are several differences between German and French ideas and that of the Summit chairman Herman Van Rompuy’s.

The summits seeks a new deal to establish fiscal discipline in community treaties, as well as immediate financial measures to end the crisis, albeit with differences among the suggested measures to implement.

“The euro will only recover its credibility if we change treaties in such way that we move forward to a estability union, and I hope we can achieve so,” German Chancellor Angela Merkel said.

French President Nicolas Sarkozy didn’t speak to press as he arrived to the summit, but had earlier adressed fellow attendees of the European Popular Party congress in Marseille and warned that if the EUdoesn’t reach a deal tomorrow, “there will be no second chances. The risk of explosion has never been so real, and that Europe will face an extremely dangerous situation.”