A deal, but to what end?

By The Economist | Brussels

BY THE standards of past summits, European leaders finished early—shortly before 10pm on January 30th. And by the acrimonious standards of past gatherings, notably last month's bust-up with Britain, this event was uneventful, even amicable. Agreement was reached on the fiscal compact, the new treaty to toughen budget rules, in record time: less than two months.

A final row between France and Poland over who gets to attend which summits was resolved with a complicated compromise. This involves variable configurations of meetings involving 17 countries (the euro zone), 23 (the largely-forgotten Euro-Plus Pact, 25 (the signatories of the fiscal compact), 27 (all EU member states, still in charge of the single market) and 28 (involving soon-to-join Croatia).

It shows that, at the very least, European leaders can negotiate rapidly when they have the political will to do so—and when the British and the Czechs decide to step aside. Whether electorates will be quite so quick to shackle themselves to Germanic fiscal rules is another matter.

But did the leaders achieve anything useful to stem the crisis in the latest of their interminable summits? Their compact—now called the “treaty on stability, co-ordination and governance in the Economic and Monetary Union”, has as its main aim the imposition of balanced-budget rules on members. This may be a useful discipline in good times. But many worry that, at a time of widespread crisis, such pro-cyclical rules risk imposing too much austerity too widely, thus darkening the spectre of recession and making it even harder to balance budgets. This may explain why leaders suddenly want to be seen talking about their plan (declaration is here in PDF) for growth and jobs, particularly in tackling the problem of youth unemployment.

Nevertheless, Angela Merkel, the German chancellor who had pushed hard for the treaty, hailed it as a great success. Many others, however, dismiss the compact with so much faint praise. “It is an important distraction”, says one diplomat. “It has gone from damaging to merely useless,” says a member of the European Parliament. Even Mario Monti, these days everybody's favourite Italian, judged the compact little more than “a decorative songbird”.

By contrast the two issues that could affect the course of the euro-zone debt crisis in the coming weeks—the fate of Greece and the possibility of creating a bigger firewall—were for the most part ignored or relegated to side-meetings. With Greece and its private creditors still negotiating the scale of haircuts to be imposed on bondholders, this may have been too delicate a time for leaders to discuss Greece. A statement from the euro zone says little that is new.

Moreover, Mrs Merkel was keen to dampen emotions after her officials floated the idea of placing the country under a commissar with the power to reject Greek budgets.When asked about such a prospect, Mrs Merkel expressed “frustration” with Greece's lack of compliance with its austerity-and-reform programme, but backed away from imposing such a draconian loss of sovereignty on Greece. President Nicolas Sarkozy of France, for his part, said "there is no question of placing Greece under tutelage.”

All leaders of the euro zone are insisting that forcing private creditors to take a hit on Greek bonds constitutes a “unique” event, for fear of causing contagion. But spreads on Portuguese bonds are rising to alarming levels, and the outlook for Italy and Spain is still wobbly.

“An inability to tackle a problem the size of Greece inspires little confidence in the ability of the EU to tackle Italy and Spain,” says Sony Kapoor, head of Re-Define, a financial think-tank in Brussels.

Germany parried demands, from Mr Monti and others, to enlarge the firewall by merging the existing temporary European Financial Stability Facility (EFSF) and the permanent new European Stability Mechanism (ESM). This would enlarge the fund from €500 billion ($659 billion) to €750 billion. Mrs Merkel said the matter should be discussed in March, as decided in last December's summit.

The British have decided not to be awkward about the compact, despite the falling-out at the previous summit, where Britain threatened to veto a change to the EU's treaties unless it were able to secure greater protection from financial-services legislation. The stalemate forced the other 26 countries to negotiate the compact outside the EU treaties (with Britain sitting in as an observer).

Mr Cameron is under pressure from Eurosceptic backbenchers to wage legal warfare to prevent signatories to the pact from using EU institutions, such as the European Commission and the European Court of Justice. “We will only take action if our national interests are threatened. And I made clear today that we will be watching this closely,” said Mr Cameron.

Nevertheless, Mr Sarkozy and Mr Cameron are still sparring. The French president's barb in a television interview a day earlier, when he mockingly said that Britain had “no industry left”, prompted Mr Cameron to rattle off a list of great British car companies—among them Honda, Toyota and Nissan (all Japanese). He said he relished the prospect of French banks moving operations across the Channel to London if Mr Sarkozy pressed ahead with his promise to impose a tax on financial transactions unilaterally.

Perhaps the most interesting dynamic was between France and Germany ahead of the French presidential elections in April and May. Mrs Merkel said that she would campaign for the re-election of Mr Sarkozy, saying he had done the same for her in the past. But she said she would not be worried if his opponent, François Hollande, who is leading opinion polls, were to win—even though he wants to renegotiate the fiscal compact and has blocked Mr Sarkozy's attempt to enshrine a golden rule in the constitution.

Asked if she could envisage having to take France to court for failure to adopt a balanced-budget rule, as provided for by the compact, Mrs Merkel said: “I cannot imagine taking legal action against France because I cannot imagine that France will not institute a golden rule.”