Last week’s European Union summit agreed to take steps towards closer fiscal integration which most analysts agree are a step in the right direction but which are probably not enough to completely calm the markets. All EU members agreed to the measures except for Britain which vetoed a new treaty. The new accord will therefore consist of an intergovernmental treaty or a pact between the 26 other members states.

The fact that we are alive and kicking in spite of what happened is a good thing- Edward Scicluna

The main points of the agreement are as follows:

• Eurozone states’ annual structural deficit should not exceed 0.5 per cent of GDP.

• Automatic sanctions will be applied as soon as a eurozone member state’s deficit exceeds the three per cent threshold.

• The European Stability Mechanism (ESM), the eurozone’s permanent bailout fund, will enter into force in July 2012. The existing European Financial Stability Facility will remain active until mid-2013. The overall ceiling of the EFSF/ESM of €500 billion will be reassessed in March 2012.

• Eurozone and other EU states will provide up to €200 to the IMF to help indebted eurozone members.

Asked by The Times Business for his views on the accord, Labour MEP Edward Scicluna said: “The basic question is what exactly happened. Here the details are still scarce and vague. The important economic rather than the political question is ‘Was it a positive step forward?’ The affirmative answer given by the Commission and Council comes out in a manner which reminds me of a bad car-crash where everybody comes out miraculously alive. From that aspect it was not bad. The fact that we are alive and kicking in spite of what happened is a good thing. The lawyers seem to have guaranteed a way forward through the bureaucratic maze, and some solutions will be enshrined in ‘primary’ law.”

Prof. Scicluna said that as European parliamentarians “we are very disappointed”. He added: “A whole year of legal wrangling and final approval by both the Parliament and the Council of the six-pack on economic governance in the euro area and the EU as a whole got cherry-picked by the group of 26 Council members. The deficit and the debts rules with their calendar-locked adjustment path and sanctions driven automatically and overseen solely be the Commission are taken intact from the six-pack. But gone are the references to address macro-imbalances with the respective scoreboards and all. Merkel certainly got her way.”

Prof Scicluna said the innovative bits of the accord refer to the “firewall” that is the strengthening of the European Financial Stability Facility by about €200 to €250 billion, through bilateral loans paid in with the IMF.

“For Malta it could be anywhere between €150 and €200 million paid in from our own CBM’s external reserves. Also the ECB will now act as an agent for this Fund, however the Fund will not be using the Bank’s balance sheet as many observers would have like. There is no lender of last resort for eurozone members as yet, and no banking licence foreseen for the EFSF or ESM when this will be brought forward next year,” he said.

“The other innovativeness is the enshrining in each eurozone member’s constitution of the balanced budget rule. This exercise will be overseen by the ECJ as to the appropriate wording and method for each member state. We have to see how this is tackled by each of the 26 member states in turn,” he added.

Prof. Scicluna said the good news from the ECB is that its conservative tight fisted policy will be no more at least as far as banks are concerned, from the December 20 forward.

“The Bank will be granting three year unrestricted credit lines to all banks in the eurozone. The liquidity crunch was getting very bad and is expected to get worse in the first quarter of next year. About €80 billion have been withdrawn from the eurozone by outsiders in just a quarter. Interbank lending is also drying up. From now onwards there is the certainty that any bank can now borrow any amount at one per cent interest from the ECB. This rate is indexed to the Bank rate. The collateral terms will be extended to include a much broader array of bank loans to private clients. The credit worthiness of these loans to be used as collateral will be decided by the national central banks, including ours. The idea is that even small banks can make use of these liquidity lines and so SMEs will not be starved of much needed finance,” he said.

Prof. Scicluna said that the European Parliament, “at least our Economic Committee”, is not “that impressed”.

He said: “Last Tuesday we huddled together late in the evening to trash out a resolution calling for further options to be considered, mainly to the issuance of eurobonds and the granting of a banking licence to the EFSF/ESM. Whether that resolution for which I am representing my group as shadow rapporteur would pass before Christmas has still to be seen. Do not hold your breath.”

Business analyst John Cassar White said the optimism following the fiscal compact to which 26 EU states agreed in principle last week is already “fizzling out”.

“Much of the attention of financial and economic analysts in the first few days after the EU leaders’ summit was focused on the headline news that Britain had refused to agree to plans to have a new EU treaty. Now the real issues are beginning to worry EU leaders and analysts.

“The reality is that for the fifth time in just over a year the EU summit has tackled the symptoms of the problem of the euro – loss of faith of the markets in the way the currency is managed. But the real problem is the loss of competitiveness in many countries in the eurozone which, of course, is complicated by the fact that the common currency is not properly backed by central fiscal governance and an absence of institutions to support it on a permanent basis,” he said.

Mr Cassar White said the latest agreement was a step in the right direction, but it is unlikely to resolve the problem.

He added: “The two main tools that can bring stability, at least in the short term, have been ignored. One is the issue of eurobonds guaranteed by all eurozone member states, and the other is the commitment of the European Central Bank to be the lender of last resort to governments. Germany is likely to continue to block the use of these tools for very good reasons – fear of rampant inflation and the transfer of funds from rich well governed eurozone states to profligate southern states.

“So the other two options are political ones – either a fiscal union, at least in the long term, or the breaking up of the eurozone with possibly the creation of a smaller eurozone made up of northern EU states like Germany, Holland, Finland, and Austria. Both will be difficult to implement and the effect on the whole of the EU will be painful.”

Mr Cassar White said the real solutions lay in major fundamental long-term economic changes to make the eurozone more competitive, as well as a package of stimulants to promote growth in the short term. Politicians, he stressed, have no appetite for these kinds of painful reforms, so they resort to procrastination and rhetoric to convince the sceptical markets that they have the right solutions for the structural problems of the EU.

On Britain’s veto of a new treaty, he said: “I believe that David Cameron has made a big mistake by insisting on conditions that never stood a chance of being accepted. The City of London is now weaker than it was before the summit because its political mentors will not be around the table where major decisions will be taken. I believe that the UK government will once again adopt a more pragmatic stance in its relations with the EU but this may take some time.

“Next year may see changes in political leadership in France, Italy and possibly even Germany. Hopefully the recriminations within the EU will be overcome because the eurozone risks a long and irreversible agony if its political leaders do not come up with political solutions that really support economic union.”