THE EUROPEAN SUMMIT (2)

Last week's European summit produced a political split between the U.K. and the other 26 Member States. But did it save the Euro?

The 17 Euro countries, and some - perhaps all - of the rest (when they have seen the details), will sign up to a new "accord". In being outside the current treaty structure, this can be done quickly and without the need for potentially difficult things such as referenda. It will limit structural deficits to 0.5% of GDP, and bring automatic sanctions for Member States that have budget deficits greater than 3% of GDP. In order to help ensure that these things don't happen, national budgets will be submitted to the Commission, who will have the power to request that they be changed.

It's important to understand two things about this deal. First, it's a longish-term plan to try to stop a crisis happening again in the future. Secondly, it represents the German view of the world, namely that the current crisis occurred because of Member States' profligacy in the past. No profligacy in future means no future crisis. Furthermore, there is neither a need for joint Eurobonds (because everybody will obey the rules) nor a desire for them (since that would simply let the existing wastrels off the hook).

But what about the short-term? Well, the deal does again buy some time, which I have always argued is worth something in a financial crisis. Nevertheless, it is trite economics to point out that reducing Governments' budget deficits from their current bloated position to that required by the accord will - in the absence of anything else - inevitably reduce aggregate demand, and thereby make it more difficult to service the current levels of high public debt. The possible "anything else" to counterbalance that effect is a revived private sector, revived by the stability brought about by the accord and by existing rock-bottom interest rates. But the links are tenuous, particularly when compared with the certainty of lower public demand. European leaders are of course hoping that the European Central Bank will ride to their rescue, once it sees the progress that has been made. That is not assured; but on balance, I suspect that they have done just enough.

So did they save the Euro? Just about, would be my verdict. But there is still a long way to go. In particular, I would bet that joint Eurobonds will eventually be part of the solution, though not for some time.

Walter Blotscher