Euro pact faces hurdle in U.K.

LONDON -- Doubts rebounded Monday over Europe's ability to solve its debt crisis and rescue the imperiled euro, as investors worried that plans for closer fiscal unity will bring little immediate relief and exposed the continent's deep political divisions.

British Prime Minister David Cameron was the only leader among the European Union's 27 members to refuse last week to join a plan under which nations submit their budgets for central EU review and limit the deficits they can run.

As the rift between Britain, which has its own currency, and the 17 nations that use the euro created uncertainty about the deal's implementation, ratings agencies Moody's and Fitch warned the plan did not even properly address the problem of lowering existing European debt.

The euro fell sharply Monday -- to $1.3183 from $1.3370 -- as market confidence in the plan and Europe's ability to end the crisis ebbed. In Italy, one of the continent's most troubled economies, workers angry about government austerity reforms went on strike and held nationwide rallies.

Germany's DAX ended the day 3.4 percent lower, Milan's stock index was down 2 percent and Italy's borrowing rates rose, indicating growing fears about its financial future. Italy's 10-year bond yield rose 0.52 of a percentage point to 6.76 percent, closing in on the 7 percent level that forced fellow eurozone nations Greece, Ireland and Portugal to take bailouts.

Cameron defended his actions in the House of Commons on Monday, telling U.K. lawmakers the fiscal pact that envisions using the EU's executive arm as a budget watchdog could face even more political hurdles. The British leader was greeted with cheers from his own Conservatives but jeers from opposition lawmakers.

"The choice was a treaty without proper safeguards or no treaty, and the right answer was no treaty. It was not an easy thing to do, but it was the right thing to do," Cameron said.

In Washington, U.S. Secretary of State Hillary Clinton backed Britain's position, telling reporters "the role that the U.K. has played in Europe will continue." But French President Nicolas Sarkozy again blasted Britain for dividing the continent.

"There are clearly two Europes," Sarkozy was quoted as telling Le Monde newspaper. "One that wants more solidarity among its members and more regulation, the other which is attached only to the logic of the single market."

Strikes idled some Fiat auto plants in Italy and forced Milan's famed La Scala opera house to cancel a performance. It was the first of days of union walkouts and demonstrations against spending cuts and tax increases that Italy's new technocratic government is seeking to restore investor confidence.

Unions say Italy's austerity measures are hitting too hard on pensioners and workers and not hard enough on the wealthy. A rally was called for Monday outside Parliament, which is expected to pass the measures by Christmas.

"Fairness, fairness!" shouted workers marching in Florence.

Italian public transport unions called walkouts for Thursday and Friday, bank workers were striking Friday and other public sector employees were to walk off the job Dec. 19.

Twenty-three European countries -- including Italy -- have said they are in favor of the fiscal pact announced Friday in Brussels, while three more say they are open to the idea.

Under the deal, a central European authority would oversee their future budgets and impose tougher spending controls. The participants would also agree to automatic penalties if countries spend too much.

Markets had initially rallied Friday on news of the deal -- despite Britain's refusal to take part -- but that optimism soured Monday as traders sought more short-term support for European financial markets. They were also disappointed that the European Central Bank sharply cut back its purchases of government bonds to only (euro) 635 million ($841 million) last week, underlining the bank's stance that indebted governments should dig out of their own debt problems.

Credit ratings agency Fitch said "it seems that a 'comprehensive solution' to the current crisis is not on offer." Moody's warned it still plans to review all EU governments' ratings for possible downgrades during the first three months of 2012.

Cameron's decision to veto an unanimous EU treaty to solve the crisis has already angered European counterparts -- and will cause complications over how the pact is implemented and monitored.

The British leader insisted Monday that his stance was aimed at sheltering London's financial services industry from burdensome new EU regulation.

"This is new territory and does raise important issues which we will want to explore with the 'euro plus' countries," Cameron told the House of Commons, referring to the block of 17 eurozone nations and nine EU others who say they'll either sign up to or consider the new pact.

At issue is whether the countries that join the Europe's new fiscal pact can use EU institutions -- such as the European Commission, the EU's executive based in Brussels -- to implement their deal. Even though the U.K. is not in on the plan, it can still torpedo it, since it does have a say in how EU-wide institutions are used.

"In the months to come, we will be vigorously engaged in the debate about how institutions built for 27 should continue to operate fairly for all member states, Britain included," Cameron said.

Cameron's spokesman Steve Field told reporters "there are issues that are raised by this, about institutions serving two masters -- the euro zone and the European Union -- and we need to look at those issues very carefully."

Under a current EU treaty, the European Commission can declare a member to be in excessive deficit, a move that forces the country to spell out in detail how it will bring down its deficit and debt or face sanctions. In practice, no country has ever been sanctioned.

In Athens, Greece's finance minister said the coalition government will cut spending further but won't impose new taxes as the country heads into a fourth year of recession.

Finance Minister Evangelos Venizelos also said talks with international debt inspectors on a second bailout were at a "difficult and critical" stage, speaking after meeting with officials from the European Commission, the European Central Bank and the International Monetary Fund.

"It's not a question of whether we can impose more taxes -- we cannot. It is not a question of whether we must cut spending more -- we must," Venizelos said. "There is much more to be done."

Greece, the country that kicked off the European debt crisis, is negotiating the details of a second bailout loan, this one at $174 billion.