The eurozone has agreed to take a big leap forward in economic integration, but failed to deliver a convincing answer to investors worried about its ability to tackle threatening debt crises in Italy and Spain.
As a result, the deal clinched by European leaders in the early morning hours of Friday seems unlikely to ease the intense financial pressures that have plagued the currency bloc for over two years. Nor will it dispel concerns that the euro area could eventually break apart, with one or more countries exiting despite the catastrophic consequences that would entail.
With Britain, the EU's third biggest economy, opting out of the fiscal process, questions about the cohesiveness of the wider bloc will also be posed.
Perhaps the most significant new element of the agreement sealed in Brussels was a green light for the euro area to provide the International Monetary Fund (IMF) with up to 200 billion euros ($267.64 billion) in bilateral loans.
These funds could be used to extend precautionary credit lines to Italy and Spain, the eurozone's third and fourth biggest economies, helping them muddle through a debt refinancing crunch in the first quarter of 2012.
But barring a rapid return of investor confidence, these resources will provide Rome and Madrid with only a temporary respite, leaving markets jittery, and Italy at least has shown a marked reluctance to accept IMF help.
"It's not the grand bargain some people had been hoping for," said David Mackie, an economist at J.P. Morgan in London. "A door has been opened with the IMF channel, but some people may say that 200 billion euros is simply not enough."
The summit had been billed as "make-or-break" for the eurozone, whose leaders have looked on in horror as contagion has spread from Portugal, Ireland, Italy, Greece and Spain — to France and even the bloc's economic powerhouse Germany.
Stock markets headed higher on Friday but bond markets pushed Italian borrowing costs higher.
Even before the summit, officials in major eurozone capitals were identifying the New Year as a potential crunch point if the markets took the view that the eurozone had fallen short.
Both Italy and Spain face a big refinancing crunch in the first part of 2012. Rome alone has a massive 150 billion euros in debt falling due between February and April of next year.
The agreement that was unveiled in Brussels had Berlin's fingerprints all over it.
Member states agreed to introduce German-style debt-brake legislation limiting annual structural deficits to 0.5 percent of gross domestic product (GDP).
Eurozone countries that breach the bloc's three percent deficit ceiling will face automatic penalties unless a qualified majority of members vote against.
Germany did fail in its campaign to convince all 27 European Union countries to write the tougher rules into the bloc's treaty, with Britain refusing to go along.
Instead the 17 countries of the eurozone, and nearly all the 10 non-euro EU members, are aiming to seal an inter-governmental agreement by March of next year — an approach which may allow the bloc to avert the need for troublesome and time-consuming national referendums in countries like Ireland.
But Berlin also made sure there was no increase in the combined firepower of the bloc's rescue funds - the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which is now set to come into force a year early in mid-2012.
And German Chancellor Angela Merkel quashed plans to give the ESM a banking license, a move which would have allowed it to tap cheap funds from the European Central Bank (ECB).
"This is a great leap sideways," said Daniel Gros, director of the Centre for European Policy Studies think tank in Brussels, referring to the new fiscal rules.
"We now have a framework that in 10 years time could restore a degree of fiscal order to the eurozone. The German view is that this is all that is needed to convince markets to buy Spanish and Italian debt. I have my doubts that it will be enough. I think the tensions continue."
ECB QUESTION MARK
The big question that remained unanswered by the summit was the role the ECB will play in supporting troubled countries on Europe's southern periphery.
New ECB President Mario Draghi raised hopes that the central bank would step up its purchases of peripheral bonds in the week before the summit by raising the prospect of a "fiscal compact" — read by some as a quid pro quo between governments and the central bank.
But Draghi doused those hopes hours before European leaders arrived in Brussels on Thursday evening by suggesting his comments had been misinterpreted.
ECB sources told Reuters the central bank would stick with its self-imposed cap of a maximum purchase of eurozone sovereign bonds of 20 billion euros a week for now and was not considering bigger action in response to the summit decision to create a fiscal union.
After cutting interest rates to historic lows and taking aggressive steps to alleviate pressure on fragile banks, Draghi may feel the ECB has done all it can to support the bloc.
French suggestions that commercial banks, now able to draw on three-year liquidity lines at the ECB, could step up their purchases of government bonds look optimistic given the same banks are being asked to deleverage and recapitalize if necessary.
Guntram Wolff, deputy director of the Bruegel think tank, said how the ECB behaved in the weeks ahead would be decisive for financial markets.
"Europe has taken a step in the right direction, but the ECB may want more," he said.
"They want a eurozone finance ministry, a true leap forward in terms of fiscal union. What they got was a step back. There will be no treaty change and that is a big disappointment for me. It remains intergovernmental and that is insufficient."
The immediate test for the bloc will be to bed down the agreements sealed early on Friday. As previous summits have shown, decisions taken in Brussels can unravel quickly once leaders return to their home turf.
A new emergency voting method designed to make the ESM more nimble, for example, could face problems in Finland and will need to be approved by the parliament in Helsinki before coming into force.
The pledge to move up the launch of the ESM to the middle of next year could also prove tough to meet because of national hurdles to the new rescue fund.
And getting 17-plus EU countries to write their new fiscal rules into a separate charter within months will also be a huge test for a cumbersome bloc that often struggles to implement its decisions in a timely fashion.
© 2013 Thomson/Reuters. All rights reserved.