How will the two speed Europe get into gear?
We had been kidding ourselves. It always felt, when you covered a Brussels summit, that Britain was there on sufferance, but the rules said otherwise: technically we were and are an equal member of a 27-nation union whose oft-explained "three pillars" of governance were applied for the common good.
Now, as is clear from Thursday night's summit statement, these common institutions are to oversee a selective "fiscal compact".
The European Commission (which the UK sits on) and the parliament (which it sits in) will adorn the architecture of a strategic economic compact which the UK is excluded from. That is the problem Prime Minister David Cameron had to confront last night.
Now there is a two-speed Europe and in order not to give up sovereignty Britain had to give up power. The long term impact is not calculable: it depends on whether the smaller, 17+ pact of euro countries, can save the single currency, avoid a slide into default and break-up, and find a way out of perpetual deflation, social unrest and poverty for the five peripheral countries.
Here is how they plan to do it:
- The European Central Bank (ECB) will, in the short term, act as an agent for the EFSF fund
- The European Stability Mechanism (ESM), the permanent fund, will be rushed forward to begin by 2012, with an effective lending capacity of 500bn euros. Instead of acting by mutual agreement it will have voting rights, with an 85% majority needed for emergency action. This strengthens the hand of north Europe over the south and is - in my view - the signal point of a north-European takeover of European fiscal sovereignty
- Euro-zone countries will provide an extra 200bn euros to the International Monetary Fund, which it is understood the IMF will then add to the funds available above, chipping in its own 250bn euros already pledged
- Probably then the ECB will step in with its long-awaited couple of hundred billion - which is already out there in the marketplace and just needs to be unleashed as long term rather than short term lending.
The fiscal compact, then, is a step towards unleashing just over 1tn euros worth of lending. This should be enough to take Italy and Spain out of the bond market shooting gallery for a year.
Meanwhile, however, the fundamental problems of Europe are racing towards us like a tidal surge. Three French banks were downgraded on Friday, and it is possible some euro countries will now face downgrades. But the investors are not waiting for downgrades: they are dumping exposure to the south European countries who have just signed up for a decade of austerity - because they just don't think the whole plan is sustainable.
In summary, I think what was achieved for Europe last night was the buying of time. But time to do what? Opinion among the economists and business people I speak to is divided: some think the fiscally united eurozone can overcome the short-term dip that will now happen and emerge as a strong, globally competitive area. Others think it's set for catastrophic breakdown.
I can only add at this stage that, by enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy.
It has done what the US Republicans would like to do - and if you think about it, it has made what Gordon Brown did, and what Barack Obama (and indeed Wen Jia-bao) is doing illegal.
The result, if it works will be stability. It is hard to see how it promotes long-term growth.