The EU leaders confirmed a new fiscal pact ensuring tougher measures on budget discipline but failed to agree on a treaty change to preserve the rules, indicating that the deal will now involve the 17 euro Zone nations plus any others that want to join. An agreement involving all 27 members fell through-raising the prospect of a split Europe- after British Prime Minister David Cameron demanded concessions that Germany and France were not willing to concede. However, on a brighter note, the EU leaders agreed on automatic sanctions for euro 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.

The 10 hours duration of talks which ran into the wee hours of Friday morning also saw the EU leaders deciding to allow the currency bloc’s future permanent bailout fund to be capped at 500 billion Euros, as Germany had insisted. It will also not get a banking license, which would allow it to draw on ECB funds to increase its firepower, another move Germany had objected to. The European Council Rompuy, who is also the summit chairman, wanted 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 ramifications. But the German Chancellor Merkel demanded a fully fledged treaty change to give the measures extra weight.

The ECB President Draghi warned the financial markets by discouraging expectations that the bank would massively step up buying of government bonds if EU leaders agreed on moves towards closer fiscal union. A poll of economists conducted by Reuters concluded that while 33 out of 57 believe the euro zone will probably survive in its current state but a worrying 38% expected the week’s summit would fail to deliver a decisive solution to the debt crisis.

As the developments from the EU Summit surfaced, shares and commodities headed southwards, while the euro remained under pressure, on growing concerns that Europe could forge a constructive plan to solve the impending debt crisis. All the major market indices including the DOW, NASDAQ and S&P 500 dropped dramatically whereas major commodities including gold, silver and crude oil also fell. All eyes are solely on today’s developments in the EU summit as another round of talks could trigger another major movement in the markets.

Have a great weekend everyone!