EU leaders tear up rules of eurozone

Public spending curbs and rules against state subsidies will be thrown – temporarily – out of the window to rescue European banks from the abyss of the global financial crisis, EU leaders agreed at the weekend. Leaders of the four largest European Union economies – Britain, France, Germany and Italy – came up with no EU-wide magic formula, or rescue package, to defend the buckling European financial system.

They did agree, however, that national governments should be at liberty to take drastic action to shore up their own financial institutions, busting EU limits on national budgets and flouting European rules against public subsidies if necessary. Meeting in Paris, the Big Four insisted that national governments must "consult" their European partners before taking action which could harm rival banks in other countries. This was a rebuke to Ireland's decision last week to guarantee all bank savings for two years but also, implicitly, a recognition that other nations may have to take similar action.

But they accepted that the rules of the Stability and Growth Pact – the eurozone rules requiring that national budget deficits should be progressively reduced to zero – should be relaxed. This was a silver lining in the crisis for the French government. Even before the financial meltdown, Paris had been struggling to meet its commitment to balance its budget by 2012.

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EU laws forbidding state subsidies to private companies would also be "applied in a flexible manner" (ie suspended), the summit decided. At France's insistence it was agreed that there should be "punishments", not golden parachutes, for the bosses of financial institutions which needed state bailouts.

The Big Four also called for urgent action to change EU accounting rules which are accused of deepening the crisis by encouraging stock-market speculation against banks.

The decision by the Big Four was portrayed by French officials as a significant lurch away from the free-market doctrine which has dominated EU economic policy for the past two decades.

French officials nevertheless claimed the summit as a victory for the can-do and interventionist instincts of the French President, Nicolas Sarkozy. The four leaders signed a declaration backing his plan for an emergency global economic summit next month to "rebuild the world's financial system". Previously, international reaction to this idea had been lukewarm at best.

The mini-summit also agreed a plan by Mr Brown to create a €12bn (£9.3bn) – and potentially €24bn – EU fund to aid small businesses.