Meanwhile, British Prime Minister David Cameron said it is vital to Britain’s national interest to remain a member of the EU despite its decision to veto a new treaty.
The euro fell, stocks slid and borrowing costs for Italy and Spain rose as investors weighed the outcome of last week’s summit that split the EU, with Britain blocking treaty change and forcing eurozone countries to negotiate a fiscal accord outside the Union.
French President Nicolas Sarkozy said the legal basis of a new accord to enforce debt and deficit rules in the 17-nation euro area with quasi-automatic sanctions and intrusive powers to reject national budgets would be worked out before Christmas.
“In the next fortnight, we will put together the legal content of our agreement. The aim is to have a treaty by March,” Mr Sarkozy told Le Monde.
An EU diplomat said the first draft of the new treaty would be ready by early next week Mr Sarkozy said the aim was to have it ratified by all member states except Britain by June.
“You have to understand this is the birth of a different Europe — the Europe of the eurozone, in which the watchwords will be the convergence of economies, budget rules and fiscal policy.
“A Europe where we are going to work together on reforms enabling all our countries to be more competitive without renouncing our social model,” the French leader said.
Italian 5-year bond yields shot up above 7%, widely seen as a danger level while 10-year yields spiked above 6.8% and Spanish 10-year yields topped 6%.
Investors’ appetite for short-term paper drove Italian one-year borrowing costs down just below 6% at an auction but yields remain uncomfortably high.
Standard & Poor's has put 14 eurozone governments on watch for a possible rating downgrade in the coming weeks, arguing the deepening debt crisis and looming recession will increase their potential liabilities and reduce their ability to cope with them.
If some of the eurozone’s AAA-rated members are downgraded, it would call into question the solidity of the eurozone’s rescue fund, which would likely suffer a similar fate.
Political aftershocks from Friday’s historic rift between Britain and the rest of the bloc continued to shake Europe yesterday with Prime Minister David Cameron facing tension in his coalition and doubts in the business community.
Mr Cameron was given a hero’s welcome by eurosceptics in his Conservative party but faces a backlash from his coalition allies when he explains a veto that has cast Britain adrift from its continental partners.
“Britain remains a full member of the EU and the events of the last week do nothing to change that,” Mr Cameron insisted in parliament.
In a defiant statement, he told lawmakers he made no apology for having demanded safeguards for the City of London financial centre in any new EU treaty, but said Britain’s interests remained fully protected by its membership of the single market.
Deputy prime minister Nick Clegg said on Sunday he was “bitterly disappointed” with an outcome that would diminish Britain’s global influence and was bad for jobs and business. Mr Clegg was absent from parliament during Cameron’s address.
In business, the chief executive of the world’s largest advertising group, Martin Sorrell of London-based WPP, told Reuters that Britain’s interests would be better serviced “inside the EU tent” than on the sidelines.