The Taoiseach has told the Dáil that a referendum will be held on the proposed European fiscal stability treaty.

Enda Kenny said the decision followed advice from the Attorney General.

The Taoiseach said he would sign the fiscal compact treaty at an EU summit in Brussels on Friday and that arrangements for a vote would be made in the coming weeks. The agreement on new budgetary rules was agreed by 25 states, minus the Czech Republic and the UK.

Both he and Tánaiste Eamon Gilmore said they were confident that the Irish people would endorse the treaty as it was in our interest. Eamon Gilmore said the referendum would come down to a vote for economic stability and recovery.

Mr Kenny said the referendum would give people the opportunity to reaffirm our commitment to responsible budgeting and "ensure the reckless economic mismanagement that drove our country to the brink of economic bankruptcy" would not be repeated.

The Taoiseach said the Attorney General had expressed the belief that the treaty was a unique instrument outside the EU Treaty architecture, and that on balance a referendum was needed to ratify it.

The pact will require governments to introduce laws on balanced budgets and impose near automatic sanctions on countries that violate deficit rules.

Fianna Fáil leader Micheál Martin said he welcomed the decision to hold a referendum, adding that his party would be supporting the endorsement of the treaty.

He said the people had a right to decide and questioned whether the AG needed to have been consulted at all.

Sinn Féin leader Gerry Adams said he welcomed the announcement, but that it marked a failure for the Government because the coalition wanted to avoid such a vote. He said it was an austerity treaty and would not help recovery.

Independent TD Shane Ross also welcomed the fact that a referendum will be held. He said it was a fiscal pact on austerity and was dictated by the French and Germans without any input from Ireland. He said debt reduction had to be tied into the ratification process.

Only 12 countries need to approve pact

A senior German MEP has told RTE News he is surprised the Government has decided to call a referendum because the intergovernmental treaty "did not involve a transfer of sovereignty of the country".

Elmar Brok MEP, a member of Chancellor Angela Merkel's CDU Party, said the fiscal compact "doesn't change anything". He said it was a question of implementing the rules everyone had already signed up to years ago when they became members of the euro.

"I'm confident the Irish people will vote yes because this does not change anything. It's a method [so that] rules which are undersigned, which have to be fulfilled by the Treaty of Lisbon and even earlier by the Treaty of Maastricht, can be implemented," he said.

Mr Brok said that without the solidarity from other EU countries there would have been "a big crash" in Ireland, as in other countries. He said that as a result of the combination of austerity measures, structural changes and "growth projects," Ireland would be stronger afterwards.

When asked what would happen if Ireland rejected the Treaty he said: "If the treaty falls... it might lose credibility for Ireland, I don't know how the markets will react to it, how the interest rates will be [for Ireland to borrow]."

Earlier, a senior EU source told RTE: "Each member state has its own democratic procedures. It's not up to us to say how a country should ratify the treaty. It's an internal matter."

The source added that the Greek situation last November, when prime minister George Papandreou suddenly called a referendum on the terms of the second Greek bail-out, was different.

"On that occasion a referendum was called after the agreement [for a second bail-out] was a done deal, when there was a very limited timetable in place and when a rejection would have cost everyone a lot of money," the source said.

Under the terms of the intergovernmental treaty, only 12 countries need to ratify the pact for it to come into effect. Should Ireland reject the treaty it will remain outside the pact, but it will also be precluded from any future funding should Ireland need a second bail-out.

The senior EU source said that even if Ireland were to reject the treaty there would be no question of Ireland leaving the euro.

Meanwhile, Irish bonds appear unaffected by the decision to hold a referendum on the fiscal compact. According to the NTMA website, the October 2020 bond (currently the closest to a ten-year in issue) closed at 6.67%, lower than last week's close.

Talks on EU firewall to be delayed

The EU has delayed planned talks among leaders later this week on increasing the currency area's financial firewall against debt contagion.

The thorny question of beefing up euro zone financial defences was meant to have been dealt with over lunch on Friday, the second day of a summit gathering leaders of the 27 EU states in Brussels.

But a senior official told the AFP news agency that the session had been cancelled amid uncertainty over Germany's willingness to raise its contribution and after G20 countries delayed a final decision on a related IMF funding increase until April.

The source said a special summit of the 17 euro zone members could be held instead within the next four weeks or so.

Euro zone finance ministers open two days of talks at EU headquarters with a discussion on Greece on Thursday afternoon. The Eurogroup has to check whether Greece has met a string of conditions for a second bail-out worth €237 billion by a February 29 deadline.

At G20 talks in Mexico at the weekend on loans to increase International Monetary Fund resources because of the euro debt crisis, finance ministers and central bankers said the euro zone had to put in place a bigger firewall before other countries would help.

EU leaders are to debate whether to combine their current firewall, the EFSF, with a permanent pot due to come into effect in July. This would give the 17-nation zone a total fund of some €750 billion.

Euro zone countries themselves have already promised €150 billion to the IMF in the hope of reassuring the markets they have the resources to tackle a re-emergence of the crisis. But countries outside the zone, including the US, Britain, Japan and China insisted at the G20 meeting that the euro zone do more.

German Finance Minister Wolfgang Schauble made no bones of Berlin's opposition to pouring in more cash to the pot, saying it "didn't make any economic sense". Nevertheless, he also noted that a decision in March would be "timely" given a planned IMF discussion on more resources.

Senior figures at the IMF have tentatively scheduled March 13 for their talks on the issue, but delays on both sides of the equation raise the prospect of the debate dragging on.

At this week's summit EU president Herman Van Rompuy is still expected to be elected to chair formal bi-annual euro zone summits. Van Rompuy is also set to be returned for a new 30-month mandate as full EU president.

Leaders are to sign on Friday morning a new treaty on fiscal stability agreed by 25 EU states, minus the Czech Republic and the UK.

Italy pays lower rates to raise €6.25 billion

Italy paid lower rates than before in an auction of five- and 10-year bonds today that raised €6.25 billion, indicating a further easing of market tensions.

The Treasury said the rate on the €3.75 billion sold in 10-year bonds was 5.5% compared to 6.08% for the last similar sale in January.