Like a desperate exam student, Europe's leaders have responded not to the question they were actually asked, but the question they wanted to answer. And even that they got wrong.
The latest Brussels agreement commits 23 European Union members to strict new budget rules. Three other states might sign up. Only Britain has rejected the new "fiscal compact" outright, which is ironic considering that David Cameron and George Osborne usually love to trumpet their fiscal rectitude. The problem with what the EU produced is that government overspending was not the cause of the eurozone sovereign debt crisis. It was private businesses – especially giant continental banks – that were the undisciplined players in the boom years and which destroyed national finances. There is nothing in the Brussels agreement that addresses that glaring weakness in the single currency's structure.
And even if fiscal laxity by politicians had been responsible for driving the eurozone into this ditch, the promise that governments will henceforth keep public borrowing in check is an irrelevance to panicking investors today. What terrifies market participants is not the prospect of some future Greek prime minister going on a spending spree, but the possibility that their holdings of European government bonds and continental bank debt could be wiped out in the coming months due to a cascade of sovereign defaults. The question the markets are asking of European leaders is: what are you going to do to prevent those defaults? For 18 months they have received no satisfactory answer.
Strip away all the displacement activity and what is there in the Brussels agreement that actually addresses the crisis of market confidence? There is a pledge for member states to increase the resources of the International Monetary Fund by €200m. Some optimistic analysts have suggested that a beefed-up IMF, operating in tandem with the existing European bailout fund, might, at a stretch, be enough to cover the €1trillion financing needs of Spain and Italy over the next three years. But investors yesterday were unconvinced and sent the borrowing costs of Madrid and Rome up once again. And, of course, the European Central Bank still sits idle on the sidelines while European capitals burn.
And Britain? Yesterday's debate about our place in Europe's political architecture was largely irrelevant. Inside or outside the eurozone, signed up or not to any EU fiscal compact, the fact remains that our economic fate remains chained to that of the Continent. And after this week's summit of denial, that is not a happy place to be.
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