Taoiseach Enda Kenny today signed the European fiscal compact treaty along with 24 other European Union leaders at a ceremony in Brussels.
All 17 countries in the euro zone and eight other European Union member states signed the treaty, which mandates automatic corrections of deficits that stray from targets. It is due to take effect on January 1st, 2013.
Following advice from the Attorney General the Government has decided to hold a referendum on the treaty.
"It's a strong signal that we've drawn lessons from the crisis," German chancellor Angela Merkel said before the signing ceremony.
Only Britain and the Czech Republic did not sign the agreement, which is seen as something of a coup for Germany, which pushed for the accord to prevent a repeat of the loose spending that led to the economic crisis.
"This stronger self-constraint ... as regards debts and deficits is important in itself," said Herman Van Rompuy, who as president of the European Council played a key role in negotiating an agreement acceptable to all signatories.
"It helps prevent a repetition of the sovereign debt crisis," said Mr Van Rompuy, who was unanimously re-elected as EC president for a second term last night.
Mr Van Rompuy underscored the importance of EU leaders carrying their parliaments and electorates with them. "You now all have to convince your parliaments and voters that this treaty is an important step to bring the euro durably back into safe waters," he told heads of state. "I am most confident you will succeed."
European leaders also declared a turning point in the euro zone’s debt crisis, shifting their focus away from the budget-cutting that has dominated two years of rescue operations.
Mr Kenny said there was no scope to slacken on reforms. "We've come to a new place but Europe still has a long way to go," he told reporters after the summit. "There's not a sense of complacency about this at all."
However, some of the optimism surrounding the summit was tempered this afternoon after it emerged that Spain has defied the EU and set a budget deficit target of 5.8 per cent for this year, compared with the 4.4 per cent agreed with the Commission.
Prime minister Mariano Rajoy said Spain was working within EU guidelines because it would still cut its public deficit to 3 per cent of GDP next year. This news, coupled with lower than expected German retail sales, meant European stocks and the euro were weaker this afternoon.
Although Greece is not the focus of this summit, Luxembourg prime minister Jean Claude Juncker baffled his EU colleagues by saying there is a back-up plan if the Greek debt swap fails.
"I have nothing to say about this odd declaration," French president Nicolas Sarkozy told reporters after the EU summit. Finnish prime minister Jyrki Katainen said there was no plan B. "We have chosen the way how to deal with the crisis."
Yesterday, the Government moved to quash suggestions from within Cabinet that Europe should cut the cost of Ireland’s bank debt burden to boost support for the fiscal treaty referendum.
Additional reporting: Reuters