By Nick Mann | 2 March 2012

A fiscal compact that aims to strengthen budget discipline has been signed by 25 of the 27 European Union member states.

EU leaders approved the Treaty on Stability, Co-ordination and Governance yesterday at a meeting of the European Council in Brussels. The UK and Czech Republic again refused to back the compact.

Despite this, the president of the European Council, Herman Van Rompuy said the treaty was an ‘important step in re-establishing the confidence in our economic and monetary union’.

He added: ‘This stronger self-constraint by each and every one of you as regards debts and deficits is important in itself. It helps prevent a repetition of the sovereign debt crisis. It will thus also reinforce trust among member states, which is politically important as well.

‘The restoration of confidence in the future of the eurozone will lead to economic growth and jobs. This is our ultimate objective. The targets on deficits and debts are intermediate targets, no aim in itself.’

The treaty is built around a ‘balanced budget rule’, which means the 17 eurozone countries will be legally bound to keep their national budgets in balance or in surplus. This criterion will be met if their annual structural government deficit does not exceed 0.5% of gross domestic product.

Ratification of the treaty, and the inclusion of the balanced budget rule in domestic legislation, which also be made a prerequisite for the receipt of financial assistance from the European Stability Mechanism bailout fund.

Before the treaty enters into force, it will have to be ratified by at least 12 of the 17 eurozone countries. Earlier this week, Ireland confirmed it would hold a referendum on its membership of fiscal compact.

The compact will apply to all members of the eurozone. Signatories that are not part of the single currency can still choose to be bound by some or all of its provisions.