Analysis: Prepare to batten down the hatches as long and winding saga nears its final chapter

IF DAVID Cameron played hardball at the European summit of 8-9 December and vetoed proposed changes to the EU treaties, this was certainly not because they would amount to a significant reinforcement of euro area economic governance and a “two-tiered” Europe.

Euro area bond yields dropped over the past few days but this owes to unprecedented European Central Bank efforts to boost liquidity in the euro area. Dropping yields is not a sign that financial markets have responded favourably to the summit deal.

With euro area debt loads rising and growth stalling, the intensity of the sovereign debt crisis is set to increase and credit-rating downgrades of several euro area governments loom.

Hopes for an agreement that could calm financial markets either ignored or wished away well-entrenched national differences on the main areas of euro area governance. The German government and its allies in the north place emphasis upon fiscal consolidation and structural reforms. The French government and its allies in the south demand support mechanisms and European Central Bank (ECB) action to save the day. Reconciliation of these two sides in such a way as to boost market confidence and bring bond yields down sustainably is unlikely.

The so-called “Stability and Growth Union” agreed in Brussels placed emphasis on reinforced fiscal rules, suggesting a German victory. Closer inspection of the proposed reforms, however, shows that German demands for “fiscal union” – including automatically imposed fines for deficit rule breakers – were watered down. The French position, with its emphasis on national, constitutionally enshrined golden rules rather than directly EU-imposed rules, largely won out.

Clearly, movement on reinforced fiscal policy was necessary to achieve German agreement on increased financial support for governments having trouble flogging their debt. But just as the fiscal rules were fudged, the agreement on additional financial support fell far short of the big bazooka for which many have been calling for some time. EU governments agreed to provide up to €200 billion more to the International Monetary Fund, to then be funnelled back to the euro area to buy up sovereign debt.

Details, however, were left vague and last week saw growing international opposition to this move. The introduction of “euro bonds”, perhaps now the only possible government action capable of calming the markets, appears to be permanently off the table, at German insistence.

In the meantime, the ECB – seen by many as a potential saviour – has effectively confirmed that despite the proposed reinforcement of fiscal rules it has no intention of stepping up its current “temporary and limited” bond buying programme. The ECB remains staunchly opposed to the monetisation of debt, while engaging in unprecedented efforts to boost liquidity.

Batten down the hatches. The euro endgame nears.

• David Howarth is a Senior Lecturer in European Political Economy at the University of Edinburgh.