The intergovernmental agreement between 23 EU countries includes the 17 eurozone members and six countries from outside it.
It supports stricter fiscal and financial discipline in future national budgets and provides a further €200bn to the IMF ‘firewall’ fund.
Abstaining from the agreement for the time being are the Czech Republic, Sweden and Hungary, who have said they want to examine details and discuss issues with their respective parties back home.
Meanwhile, Prime Minister David Cameron, after hours of holding out for the British “national interest”, took a definitive ‘no’ stance which could see the UK left out in the cold when it comes to vital economic policy decisions made on a Europe-wide scale.
Tom Elliott, global strategist in the investment team at JPMorgan Asset managemnt, used the analogy of pies to explain the developing situation.
If the European Union is one pie, then the eurozone is a flavoured centre within that pie, whereas the intergovernmental agreement announced yesterday is an entirely different pie, and one the UK is not involved in the baking of.
The danger of that is the pie could take on a flavour the UK does not like.
Threat to the City
"It’s very difficult for a powerful financial centre to exist if it starts building walls against its neighbours, or if they start erecting them against it," he said.
One possible result of the 23-member agreement is a two-speed Europe where countries in “The 23 Club” move closer together and those not involved are excluded.
"The UK has a thriving financial sector in part because we are intimately linked with the eurozone. If the UK does not want to play ball then they (The 23 Club) could make life very difficult," Elliott added.
He said it must annoy Germany and France that the most liquid market to buy German bunds and French government bonds is in London, even though the UK is not in the eurozone.
If they managed to grab that trade by deciding that no euro trading could be done outside the eurozone, or by placing trade tariffs on activity outside the eurozone, then London and the UK as a whole would suffer.
Not a done deal
But economists at Bank of America Merrill Lynch said the 23 Club was not as united as it seemed, with serious threats of rebellion stemming from Ireland, Finland and the Netherlands on various themes within the agreement.
Another uncertainty is how the new fiscal rules will be implemented since European Union institutions which oversee legislation in Brussels cannot have a formal role in any agreement outside the EU treaties.
One benefit of coming to an intergovernmental agreement outside EU treaties is that it is expected to be implemented much quicker than it would if it required treaty changes.
President Sarkozy expected text of the new agreement to be completed by March, whereas treaty change could take years to enforce, according to reports in the Financial Times.
