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Europe pact: Members must balance budgets or suffer sanctions

European leaders signed a fiscal pact that would enforce balanced budget among member states. Leaders also pledged to promote growth. Members must still ratify the pact.

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Germany's Chancellor Angela Merkel meets with France's President Nicolas Sarkozy (c.) and Italy's Prime Minister Mario Monti (l.) shortly before an informal meeting of the European Council ahead of the European Union leaders summit in Brussels on Monday.

Jesco Denzel/Bundesregierung/Reuters

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The fiscal pact signed by Europe’s leaders Monday aims to enforce budget discipline through the threat of automatic sanctions on countries that breach deficit limits and do not present a balanced budget by prescribed deadlines.

But leaders also pledged to promote growth and target high unemployment, in a sign that the relentless focus on austerity measures alone to battle Europe's economic woes is wearing thin.

Critics have argued for some time that the EU’s tough austerity drive was undermining countries struggling to gain the economic momentum that will win the confidence of financial markets, and was actually driving these countries into a recession.

“Austerity needs to come in very carefully administered doses, otherwise you kill demand,” says Holger Schmieding, chief economist with Berenberg Bank in London. “At the same time you need to reform the labor market, make it easier for people to find jobs and easier for businesses to start."

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