To have split the European Union, isolating one of its largest members, as the price for a decisive deal to end the eurozone financial crisis would have been a tough political choice, but an understandable one. The French and German leaders have created instead a damaging rift with Britain without delivering any worthwhile advance at all in their slow-motion response to the crisis.

Friday's agreement in Brussels adds little to the inadequate arsenal available to defend the eurozone, which remains vulnerable to weakness in sovereign bond markets and to inadequately capitalised banks. Proposals to re-fashion the eurozone can be judged against one simple criterion. Would the present crisis have been avoided, or at least substantially moderated and easier to resolve, had the new measures been in place since the euro's launch in 1999? On this basis, Friday's measures came up short once again and will be tested soon in the markets.

The self-serving Franco-German narrative has remained unaltered as the crisis intensified over the last three years. The monetary union was derailed, we are to believe, by a few small members pursuing irresponsible budgetary policies. Weaknesses in the design and management of the common currency are not acknowledged and strict adherence to fiscal rules is promoted as the principal remedy. Solvency problems for banks and sovereigns are denied or downplayed and grudging liquidity fixes devised at snail's pace. Friday produced yet another instalment in this tiresome evasion.

The only country which broke the fiscal rules in a serious way in the years prior to 2008 was Greece, simply too small to matter. If Greece had never joined the euro, there would still be a serious banking crisis in Europe today.

The Council statement released on Friday starts with the following assertion: "The European Union and the euro area have done much over the past 18 months to improve economic governance and adopt new measures in response to the sovereign debt crisis."

This is self-congratulatory spin. The crisis has worsened dramatically over those 18 months due to inadequate policy responses, some of which have made things worse. The description 'sovereign debt crisis' is accurate enough now, but if the banking crisis had been recognised as such, which would have required a degree of Anglo-Saxon candour on the part of the European Central Bank, it need never have turned into a Europe-wide sovereign debt crisis at all. The main component in the measures announced is a souped-up budget pact, which sets demanding long-term targets for deficits and debt, along with promises of tighter surveillance and yet more meetings.

The phrase 'fiscal union' has been deployed systematically to describe this potpourri, a conscious and deliberate abuse of language and an attempt to throw sand in the eyes of the public. The European Union is not a fiscal union and the eurozone will not become one either, should these measures be adopted. A fiscal union would see a large portion of tax revenues paid into a central treasury, with a corresponding portion of public expenditures also financed centrally. Member states experiencing tough times (Germany ran a fiscal deficit at 9.5 per cent of GDP in 1995, due to re-unification costs) would automatically pay less to the central treasury, and receive more.

Economists have long argued that, in a currency union where the option of exchange rate change is sacrificed, automatic transfers through a fiscal union are desirable to compensate. The latest Brussels agreement, a budget-tightening pact, seeks to cloak itself in undeserved legitimacy through this mis-description.

The budget-tightening aspirations are poorly thought through, and will prove unenforceable without treaty changes and open up a legal minefield without the support of all 27 EU members. They are also pretty meaningless for over-borrowed countries, where market discipline will constrain deficits and debt without any assistance from European rule-makers.

The real and present danger, which lies in the Italian and Spanish bond markets and in the undercapitalised banks, is not seriously addressed in the decisions taken. In yet another communications misadventure, new ECB president Mario Draghi appeared to promise prior to the summit that ECB intervention in bond markets would be stepped up if the summiteers agreed a tighter fiscal pact. They did, but Draghi promptly explained that this is not what he meant at all, and expressed surprise at the interpretation placed on his remarks. If you are ECB president, clear communication is the responsibility of your audience, it would appear. Markets will be disappointed that the stability fund has not been expanded adequately, and the modest additional resources to be routed through the IMF cannot be used to support bond markets. A disaster in the bond market, or major bank insolvency, will be dealt with through calling yet another summit.

An intriguing feature of the Friday accord is a roll-back in the design of the European Stability Mechanism (ESM), which is to replace the temporary EFSF stability fund. The ESM will no longer contain punitive default clauses on new European sovereign debt. These clauses were unveiled by Merkel and Sarkozy in Deauville in October 2010 and predictably sparked a damaging sell-off in bond markets. Fourteen months later, and without a word of apology or a hint of contrition, the Deauville brainwave has been quietly dropped. Which officials in the French or German finance ministries came up with this now-abandoned wheeze? Has anybody been sanctioned for screwing up the sovereign bond markets of several European countries to no useful purpose?

A rather ominous proposal in the communique reads as follows: "In order to ensure that the ESM is in a position to take the necessary decisions in all circumstances, voting rules in the ESM will be changed to include an emergency procedure. The mutual agreement rule will be replaced by a qualified majority of 85 per cent in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed when the financial and economic sustainability of the euro area is threatened."

Any country with 15 per cent of the votes can block a future bail-out. The Finnish government has not agreed to this, since it would give a veto to any one of France, Germany and Italy. In the event that Greece, Ireland or Portugal needed activation of the ESM, or that a fourth country such as Spain got into trouble, they would be at the mercy of any of these three countries which chose to impose conditions. It is rather strange in another sense -- in what circumstances could a country's need for bailout not be seen as an emergency?

Neither the stability fund, already struggling to raise money in the markets, nor its ESM successor have been given adequate funds to back-stop Italy and Spain, the likely pressure points in 2012, and the IMF involvement looks too small at €200bn to make a decisive difference. There will now follow efforts to craft a binding agreement among the 26 (25 if Finland opts out) countries which support the package. The lawyers are hovering, and there is every prospect that the proposal will come unstuck. There is no precedent for a subset of EU members undertaking a major economic commitment outside the legal framework and institutional structures of the EU.

Provision for bullying small member states over fiscal competition appears to be catered for in the following thinly-disguised provision: "For the longer term, we will continue to work on how to further deepen fiscal integration so as to better reflect our degree of interdependence."

There is no point to this component in the communique unless it means what every Irish commentator thinks it means: namely another assault on smaller states by larger ones with fiscal axes to grind. Should a referendum be needed in Ireland to implement any new treaty, a reassuring visit from the president of France is unlikely to help.

As with all previous Brussels summits, there are no proposals to re-model the monetary union itself. If you believe that the problems are all caused by budgetary excess, there is no need to contemplate a re-design of the European Central Bank or the construction of a proper currency union with centralised bank supervision and clear procedures for bank resolution. Each member state in the eurozone is required to adhere to tighter, and quite arbitrary, fiscal targets and to look after its own banks. There will be no durable currency union in Europe until these issues are acknowledged and addressed.

- Colm McCarthy

Originally published in