Standard and Poor’s, a credit-rating agency, said all 17 eurozone members, including France and even Germany, could lose their AAA ratings without speedy action to resolve the crisis.
A downgrade would effectively scupper the euro rescue because the EUbail-out fund would no longer be able to raise money on bond markets.
S+P has told eurozone countries including Germany, France, the Netherlands, Austria, Finland, and Luxembourg that they could be downgraded because of the failure of leaders to resolve the debt crisis.
The “lack of progress the European policy-makers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union,” the agency is said to have told them.
The warning overshadowed the latest Franco-German attempt to agree a treaty creating a fiscal union in the eurozone. Angela Merkel and Nicolas Sarkozy yesterday warned David Cameron that they will push ahead with their new treaty whether or not Britain signs up.
The challenge came as Mr Cameron hit back at Iain Duncan Smith and other Tory eurosceptics who have suggested that any change in EU rules should be put to the British people in a referendum.
Mrs Merkel and Mr Sarkozy met yesterday in Paris to discuss a new European treaty to create a “golden rule” of balanced budgets for eurozone states. Members would face automatic sanctions for large deficits.
Financial markets rose after the meeting as traders calculated that the plan would protect indebted countries such as Italy and Greece. The rally came even though Germany backed away from plans to let the European Court of Justice veto national budgets that would run up excessive debts.
The two leaders also made no progress on letting the European Central Bank intervene in the crisis.
Mrs Merkel and Mr Sarkozy said the new treaty should be agreed by March. The details will be debated by EU leaders at a summit in Brussels on Thursday. Herman Van Rompuy, the EU president, said the summit will determine “the survival of the euro”.
Critically for Mr Cameron, France and Germany said that they were now willing to agree a deal among only the 17 eurozone members instead of also getting the consent of the 10 EU members who do not use the single currency. Mr Sarkozy said all leaders will be asked for their decision in Brussels. “We will go around the table, and then we will see if we have an agreement of the 27 or an agreement of the 17,” he said.
The challenge leaves Mr Cameron choosing between two options that allies admit are both likely to trigger a Conservative rebellion. Some senior Conservatives believe a treaty signed by only 17 states would accelerate a two-speed Europe where euro members would form a “caucus” that could push through financial regulations and damage the City.
A treaty of all 27 EU states would expose Mr Cameron to Tory demands to win back British powers from Brussels in exchange for his consent, and bolster calls for the new text to be put to British people in a referendum.
Mr Cameron is said to lean towards a 27-member treaty, but is also prepared to see the 17 euro members go alone. Government sources last night admitted it would be “difficult”
to avoid a eurozone-only treaty. Chris Heaton-Harris, a leading Conservative eurosceptic, said that a 17-nation treaty would create “an awful lot of caucusing of power around the eurozone countries, which directly affects how the UK is represented in the EU”.
Iain Duncan Smith, the Work and Pensions Secretary, is among Tories who have suggested that a “major treaty change” would automatically trigger a referendum under the European Union Act. The Prime Minister’s spokesman said Mr Duncan Smith’s interpretation of the law was incorrect: “That is not what is set out in the Act.”
Mr Cameron insisted that he had no intention of holding a referendum. “As prime minister, I am not intending to pass any powers from Britain to Brussels. So I don’t think the issue will arise.”
Even if Mr Cameron could beat back a Tory call for a referendum after a 27-nation treaty, he would still face intense pressure to regain British control over social and employment legislation.
An aide to Owen Paterson, the eurosceptic Northern Ireland Secretary, said a new treaty was “a major opportunity” for Mr Cameron to begin a repatriation of powers to the UK.
The Telegraph
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