EUROPE is sleepwalking into a prolonged depression. The prospect of 2012 seeing the start of the break-up of the eurozone is a real one. Financial markets are already starting to pick apart what looks like the latest, if more sophisticated, attempt to kick the can down the road.

Britain has isolated itself on the fringes of the European Union, perhaps the most significant development at a summit that assuredly did not draw a line under the crisis in the single currency. But at least the interests of the City of London were defended. For now.

In short, the summit that was supposed to save monetary union has been little short of disastrous. Going into the talks, the markets hoped for a happy ending to the sovereign debt saga: a deal to pave the way for the European Central Bank to ride to the rescue of Italy and Spain, under siege from the bond vigilantes.

What they got instead was political schism, half-baked reforms and the complete absence of any fresh economic thinking.

The markets were always absurdly optimistic about the outcome for the summit but, even so, it could still have had positive results. Three things were needed to make it a success: there had to be a strategy for growth that went beyond calls for ever-greater austerity and long-term structural reform; there needed to be a real commitment from member states to put their public finances in order; and the ECB had to show a willingness to do whatever was necessary to bring down bond yields in the troubled periphery of the euro area.

Not one of those objectives has been achieved. What was needed was a route map out of a situation that threatens Europe with at least one and perhaps two years of crisis. What we got instead was a blueprint to prevent the next crisis, assuming that monetary union makes it that far.

The fiscal pact is ferociously deflationary. Europe is going to have its own balanced budget rule, so beloved of US fiscal conservatives, which will prevent countries from running a budget deficit of more than 0.5 per cent of GDP once the state of the economic cycle is taken into account. This gives them a bit of wriggle room to run budget deficits in recession, but not all that much.

Countries will be obliged to get their debt levels below 60 per cent of GDP, and the plan is for them to reduce annually their gross debt by one 20th of the difference between the current level of national debt and the 60 per cent limit. As James Nixon of Société Générale notes, this may yet prove to be the most draconian of all the new rules.

These curbs would seriously restrict the freedom of action of individual countries to run independent fiscal policies, which is why Angela Merkel proposed them in the first place. Berlin's idea is that the single currency would be better off if everybody played by one set of rules, German rules. —The Guardian, London