Ben Chu: This medicine alleviates the symptoms – but won't eradicate the disease

It was the banking sectors of countries such as Ireland and Spain that effectively destroyed their public finances

The big day was supposed to be Friday. But the eurozone's Big Two seem to have decided that the Brussels meeting at the end of the week will be nothing more than a rubber-stamping exercise. Angela Merkel and Nicolas Sarkozy announced yesterday that they had reached an agreement on how to stabilise the eurozone. It would seem that the job for the rest of Europe's leaders on Friday is simply to turn up and approve what they have cooked up.

The deal seems to bear a deeper German, rather than French, stamp. There will be treaty change for the 17 nations of the eurozone and a new regime to limit borrowing by member states – both central demands of Ms Merkel. There will be automatic fines for fiscally lax states and the European Court of Justice will verify national budgets. But there remains doubt about the extent to which the fiscal enforcement regime will be beefed up. The European Court will not, we were told yesterday, be able to veto budgets. And there is no detail on the size of the national fines so we cannot say how much of a deterrent these will be.

Yet there is an absurdity about this whole exercise. This is not a crisis driven by over-borrowing by states. Yes, the former Greek government spent too much and deceived its eurozone partners about its finances. But the governments of Ireland and Spain were running budget surpluses right up to the moment the roof fell in on them in 2008. It was the banking sectors of those countries – facilitated by profligate financial institutions in France and Germany – that were out of control and effectively destroyed their public finances. Ms Merkel's treaty changes will not address that fundamental flaw – and they will not help to alleviate the present crisis. As such, the German Chancellor is engaged in elaborate displacement activity.

There's also a potential danger to this deal. Ireland has a habit of holding referendums when EU treaties are changed. And the Irish public rejected the most recent two (Nice and Lisbon) at the first time of asking. A lost referendum in a member state at a time of severe austerity in parts of Europe could have politically explosive consequences. Ms Merkel's displacement activity might end up proving very costly indeed.

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