Chronic Pain for the Euro

A lottery ticket vendor selling tickets in Rome. How much money is needed to protect Italy from speculative attack is unresolved.

VIENNA — The deal on Friday in Brussels to reformulate the rules of the euro zone has probably saved the shared currency for now — but there may be less to it than meets the eye.

At least four major issues still need to be resolved: how much money is needed to protect Italy now from speculative attack; whether banks will stumble because of the crisis; the isolation of Britain, which does not belong to the euro zone; and not least, whether the Brussels cure, prescribed by Germany, fits the disease.

With mounds of European debt due to be refinanced early next year, the crisis is far from over. “More tests will obviously come, and soon,” perhaps as early as the opening of financial markets on Monday, said Joschka Fischer, the former German foreign minister.

And there are risks remaining even in getting the Brussels deal ratified, which is likely to take until late summer 2012 at the soonest.

The European stock markets had slipped by mid-morning on Monday and, in a potentially ominous sign, Moody’s Investors Service said it could downgrade the sovereign ratings of some European Union countries in coming months, adding that the crisis remained at a “critical and volatile stage.”

The agreement, under which the euro zone’s 17 member governments accept more oversight and control of national budgets by the European Union, “was a big step, which was pushed on the Europeans by the markets,” Mr. Fischer said. He has been sharply critical of what he considers Chancellor Angela Merkel’s hesitant, slow and incremental management of the crisis, but he said that “in the end, the markets have limited the options of the political leaders, especially of Merkel, and pushed her into giving more support for the euro.”

Germany got nearly unanimous agreement on a treaty to pursue its favored remedy for the sovereign-debt crisis that has shaken the union for months: fiscal discipline, central oversight and sanctions on countries that break the rules about debt limits, which will be written into national laws. The rules themselves are not new: they recap the ceilings set in Maastricht 20 years ago when the euro was created, with deficits limited to 3 percent of gross domestic product and cumulative debt eventually held to 60 percent of G.D.P. Now, though, those formulas will have teeth.

The idea is that, with the new fiscal discipline in place, the Germans and the European Central Bank will be willing to do more to solve the euro zone’s current troubles.

But many argue that the core problem is less discipline than the lack of economic growth and the deep current-account imbalances — exporters versus importers — within the euro zone. Austerity tends to bring recession, not growth, and Europe needs growth to cope with its debt. But structural changes and investments to accelerate growth and competitiveness generally take years to bear fruit.

“The relationship between 3 percent and fiscal vulnerability is a weak one,” said Jean Pisani-Ferry, director of Bruegel, an economic research institution in Brussels. Both Spain and Ireland have run balanced budgets, or even budget surpluses, in recent years, and both were well within the Maastricht criteria, but became speculative targets in the credit crisis anyway; Italy has one of the lowest budget deficits in the euro zone, and runs a primary surplus, meaning that its budget is in the black when debt service is discounted.

“The countries were not in crisis because of bad management of their budget,” said Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. He called the Brussels deal “rather disappointing over all, since it means that there will be more rigor, more austerity, which means less growth ahead.”

The issue is how to promote economic growth and competitiveness in the poorer countries at the euro zone’s periphery that ran up large debts and trade deficits. “You need discipline as part of your stabilization strategy, but we also need a much stronger growth strategy for the southern countries,” including Italy, Mr. Fischer said.

Bernard Avishai, a contributing editor of the Harvard Business Review, said that the questions now should be: “Under what scenarios are the southern economies most likely to grow? Who will be starting, owning, and profiting from what businesses? In that context, would not Spain, Portugal, Greece, et cetera, be better off with their own currencies? Would they not become more competitive if they could simply devalue them?”

His answer to that last question is no: A globalized, networked economy requires a stable currency, he said. Inside the euro or out, he said, the real competitors for countries like Greece and Portugal are Poland, Hungary and Romania, and to thrive they need to remain part of the European economic space and invest in education and high technology to attract more capital from abroad.

“The path to development is not devalued money in the hinterland, but intellectual capital from the metropole,” Mr. Avishai said. “The key is not cheap labor but rich brainpower, the climate that will cause globals to inject the DNA of various businesses into the commercial life of southern European states.”

Mr. Pisani-Ferry believes that significant progress was made in raising the “firewall” of bailout money available to lend to vulnerable economies like Italy and Spain, which need to refinance large debts at manageable interest rates.

European leaders agreed to provide another 200 billion euros from their own central banks to the International Monetary Fund and leverage about half of the existing bailout fund, the 440-billion euro European Financial Stability Facility, to give it more impact. They also agreed to speed the creation of a permanent fund for dealing with financial crises, the 500-billion-euro European Stability Mechanism, moving its start date up to July 2012. The permanent fund will be run with help from the European Central Bank; in March, European leaders will consider enlarging that mechanism and letting it borrow, like a bank, directly from the E.C.B.

“On the firewall, I think it is enough,” Mr. Pisani-Ferry said. “It’s a change of scale.” But American officials are not so sure; President Obama is continuing to urge a larger commitment of money to defend the euro zone.

He noted that the agreement in Brussels did not address “what to do to break the link between banking weakness and sovereign weakness,” which he called “a failure to recognize the importance of the issue” or to clarify how banks that are vulnerable to the debt crisis and to sluggish growth will be backstopped. Already, Société Générale and other bank giants have trouble getting other banks to lend them money. That could force governments to step in with a series of partial nationalizations that would further roil markets.

The E.C.B. last week tried to alleviate some of the pressure by offering banks longer-term loans at low interest rates. Even so, if big countries like France and Germany lose their sterling credit scores, that would produce a fresh wave of instability.

In the meantime, analysts say, financial markets will continue to project an almost bipolar reaction to the crisis, lurching forward on hopes of political breakthroughs and slumping anew as the Continent’s economy and its banks deteriorate in tandem.

Then there is Britain, and its refusal to go along with the other members of the European Union to make the agreement a full-fledged E.U. treaty amendment. Britain’s isolation and the visible division in the union are not welcomed by most members, who value British practicality and economic liberalism and see it as a vital part of the European single market. Prime Minister David Cameron’s stance was initially popular at home, but his coalition partner, Deputy Prime Minister Nick Clegg of the Liberal Democrats, said that Mr. Cameron’s effort to veto was “bad for Britain” and could leave it “isolated and marginalized.”

Mr. Cameron has threatened to block Brussels institutions like the European Commission and the European Court of Justice from being used to oversee the treaty, since it does not include all 27 members, but French officials said that sounded like another bluff. “The British don’t want us creating our own euro-zone commission and court,” one senior official said.

In general, Mr. Pisani-Ferry said, the Brussels deal is like a pill for pain — it makes you feel better, but “it’s not targeted at exactly what you’re suffering from.”