In yet another crucial emergency summit in Brussels — the tenth such meeting in just 18 months — EU leaders agreed upon a basic framework for tackling the Greek debt crisis, which has been a major source of uncertainty in financial markets and this week threatened to spill over into the core region, with global investors turning their sights on Italy and Spain.

Just to illustrate the mood here in Europe preceding the meeting, consider some of the following headlines: “Steely hush descends as leaders face moment of truth for the single currency“, “The eurozone summit is make or break for Greece“, “Europe is now bumping and bumbling its way towards a terminal crisis“, and “Europe at the Brink“. Even the sober Economist wrote that the euro is “on the edge“.

But despite this overwhelming sense of urgency, European leaders once again managed to muddle through without addressing any of the underlying factors that led to the crisis. Certainly, there was a change of tack: for the first time, it was agreed that Greece’s sovereign debt is simply unsustainable and that it will have to go into selective default, meaning private creditors will be forced to take a hit.

Yet this debt restructuring is largely symbolic. In a draft document, EU leaders agreed to help bring down Greece’s debt levels (currently 140 percent of GDP) to the Italian level (120 percent of GDP), but at current growth rates, and with the draconian and counterproductive austerity measures being imposed upon the country, Greece’s debt is still projected to grow to 200 percent of GDP by 2015.

Polishing the Debt

Either way, the question is whether the Italian case constitutes a “sustainable debt ceiling” in the first place. This week, Italy was unexpectedly drawn into the whirlpool of the rapidly escalating euro crisis. While it is clearly not insolvent in the way that Greece is, the speculative attacks on Italy are the latest confirmation that objective facts matter very little in a world dominated by the ‘animal spirits’ of jittery financial markets.

EU leaders decided to extend the debt maturities of Greece’s initial 2010 bailout, lower the interest rate to 3.5 percent and start buying back Greek debt through the EU’s own bailout mechanism, the European Financial Stability Facility. Finally, it was announced that EU leaders intend to set up a Marshall Plan-inspired program of public investment to nourish the periphery back to growth.

The latter point especially is a positive development, and financial markets immediately greeted its announcement with enthusiasm. Stock markets rallied and the euro regained more than the ground it had lost on the dollar earlier in the day, when investors were still anxious to hear more details about the last-minute deal struck between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin last night.

But while this positive market response may temporarily provide the illusion of respite, the truth is that Europe has once again taken the easy route. Once again, it has failed to address the institutional shortcomings and structural imbalances that lie at the heart of the single market and common currency. Once again, in other words, it has failed to address the root causes of this potentially catastrophic financial crisis.

Failure to Address the Root Causes

In a troubling sign that European leaders are merely kicking the can down the road, there was no agreement on how to address the underlying problem of Europe’s own insolvent banks, on how to stop speculators from betting on (and thereby instigating the self-fulfilling prophecy of) a disorderly Greek default, or, for that matter, on how to bring the European Central Bank’s one-size-fits-all monetary policy (focused on combating inflation by raising interest rates) in line with the reality of an increasingly depressed periphery.

The most glaring shortcoming of the meeting, however, was the failure of EU leaders to face the facts on the disastrous outcome of the austerity memorandums that have been forced onto Greece, Ireland and Portugal, and that are indirectly being proscribed onto Italy, Spain and the rest of the euro zone. EU leaders still do not seem to recognize that by imposing such harsh austerity measures, they may be digging their own grave.

Aside from the socio-political sustainability of the austerity programs — hundreds of thousands of Greeks and Spaniards have been rallying against budget cuts for over two months now — there is the question of its economic irrationality. In the past year of severe, unprecedented budget cuts, the Greek economy contracted by almost five percent. In 2011, it is set to contract for the third year in a row.

These are Great Depression-level reductions in economic output that threaten countries like Greece with “widespread, long-term poverty“, while at the same time only compounding their debt problems. In this light, the framing of the euro crisis as a “sovereign debt crisis” looks increasingly silly. In reality, Europe is facing a crisis of structural imbalances — between a highly productive core and an unproductive periphery. Austerity, by draining the economy of capital and cutting crucial public investments, is only further accentuating these imbalances.

A Stark Choice

There are really only two ways to address those structural imbalances in a decisive and sustainable manner. Either the depressed economies leave the euro zone, allowing them the ‘luxury’ of an external devaluation, which will improve the global competitiveness of their industries while cutting off the cheap credit lines that contributed to the build-up of the debt bubble during the boom years. This is what Argentina did when it broke its peg to the dollar and devalued the peso in 2002, with spectacular results.

Either that, or — and this is certainly the trickier option of the two — Europe will have to embrace a form of fiscal union that institutionalizes permanent welfare transfers from the rich, fast-growing core (Germany, the Netherlands, Finland, Austria) to the poor, stagnating periphery (Greece, Ireland, Portugal, Southern Italy and Southern Spain). This progressive ‘European’ solution, however, would require thorough reform of the EU’s fundamentally undemocratic institutions and is likely to run into significant opposition from an increasingly Euroskeptic populace.

Certainly the choice is not as black and white as I just painted — there are many forms of fiscal union that can be imagined, and many different strategies of an exit from the euro zone that could be contemplated. But the bottom line remains: Europe has devised a single market and a single currency without the overarching political institutions to regulate them. This neoliberal arrangement was bound to produce crisis.

Whatever EU leaders may decide on, in the end, they will never be able to solve the underlying dynamics that gave rise to this crisis — and that keep feeding into it today — without taking a clear position on the stark choice between a Europe of nation states (allowing countries like Greece to exit the euro) or a Europe of an ever-closer union (requiring some form of fiscal integration and pan-European democracy).

The Threat to European Democracy

Evidently, if Europe were to aim for the latter, the fiscal transfers cannot just be subsidies, like the EU’s disastrous Common Agricultural Policy. They will have to be productive investments aimed at increasing growth and employment in the long-run, for example through investment in clean energy development or high-speed rail transport. These investments would have to be de-coupled from today’s disastrous IMF-style loan conditionality.

This brings us to the final issue which was ignored at the summit in Brussels today, namely the gaping democratic deficit that lies at the heart of EU institutions today. Amid a deepening sense of political alienation and a lack of socio-economic agency, Europe has experienced an unprecedented outburst of civic protest in recent months, with citizens from all walks of life and all political inclinations, from Madrid to Athens. calling for “real democracy now.”

Similarly, intellectuals like Amartya Sen, Jurgen Habermas and Dani Rodrik have been warning that European democracy is under acute threat of being submitted to the short-sighted concerns of the large banks and rating agencies. European leaders do not seem to understand the corrosive effect that this financial corporatism and depoliticized technocracy is having on people’s trust in EU institutions.

All in all, the markets may rally for a while and the peripheral debt problem might have been shoved beneath the carpet for a little longer — but the fundamental structural imbalances and institutional shortcomings of the European Union will still remain a source of friction and crisis in the months and years to come. At this pace, it increasingly begins to look like Europe’s leaders are determined to commit themselves to a permanent state of crisis.