Martin Wolf writes in the Financial Times that too much attention has been paid to the decision of Cameron to veto the proposed change in the EU treaty. This was a bad decision because it isolates the UK from the EU, and that will eventually harm the City of London banking interests that he was trying to protect. He argues, however, that more attention should be given to the failure of the summit to deal with the real structural problems in the eurozone. The effort to create a stability and growth union through fiscal austerity will produce an instability and stagnation union instead.
It may help to understand Wolf's reasoning if we look at a single vulnerable country in relation to Germany. Spain's economy was in good shape prior to the collapse of the real estate bubble. The collapse of asset prices led to private sector deleveraging. This produced a surplus of savings in Spain and a decline in private sector spending. This implies that Spain's trade deficit with Germany must turn into a surplus to compensate for the decline in private sector spending. That would require adjustments in Spain that would make it more competitive with Germany. Imports from Germany would fall and exports from Spain to Germany would rise. The other possibility would be for the trade surplus to rise via the rest of the world for the combined team of Germany and Spain. Even if it were possible for Spain to make the necessary structural changes it would take a long time to achieve that result.
The other alternative for Spain is to deepen its recession by reducing its government deficit through an austerity program. The intent is to encourage investors to gain confidence in Spain and purchase its debt at affordable prices. Investors, however, are not easily fooled. They do not want to invest in an economy that is shrinking. That is what we have in Spain today. It is in a long term structural recession that requires wages and prices to deflate. In the meantime Investors demand a risk premium for Spanish debt.