It’s crunch time again in Europe tonight, following — you guessed it -– further bad news from the eurozone.

It’s now up to the 27 EU leaders gathering in Brussels to come up with something dramatic to regain the confidence of markets after the European Central Bank refused to backstop the zone in bond markets.

On previous form, there’ll be an announcement of another comprehensive plan tonight to address the crisis, one that briefly rallies markets until the lack of detail and, more particularly, lack of sources of money, become apparent even to the most optimistic analysts and investors.

It will be all up to the politicians to devise a credible plan — for longer-term reform and to address the immediate crisis. Definitely do not expect the ECB to come riding over the hill to save the eurozone (and the euro) with bigger purchases of government bonds or by lending to the International Monetary Fund. Markets sagged overnight Thursday after European Central Bank President Mario Draghi killed off any idea that the central bank would backstop Europe in its present woes.

The ECB did cut interest rates by a quarter of a percentage point to 1% and said it would supply banks with unlimited cash for three years. The lending program will help support the region’s banks and hopefully start thawing the credit freeze that has been gradually gripping the region. But there will be no wholesale purchases of debts issued by under-pressure countries such as Italy or Spain. The response from markets was “that’s all you’ve got?”

And the European Banking Authority has produced another problem: some of the eurozone’s biggest banks need to raise around €115 billion of new capital if they are to meet new capital rules. With some banks in France and Germany (plus Greece, Spain and Portugal and Italy) all but shut out of financial markets at the moment, it means governments will have to provide the money, and that will concern ratings agency Standard and Poor’s. S&P, continuing to show the sort of rigour that strangely eluded ratings agencies three years ago, has already warned 15 of the 17 eurozone countries (and many of their banks) that they face credit rating downgrades if the zone doesn’t come up with a convincing strategy to end the problem.

But S&P has also warned it is worried about the prospects of higher government debt to fund bank capital needs, and the impact of the slowing eurozone economy, which will increase deficits and debts and require more spending cuts and tax rises in 2012, thereby making the slump worse. Underlining the weakened economic outlook, the ECB cut its forecast for growth next year to 0.3% from 1.3%, meaning many of the 17 member states will be in recession. And while inflation will slow to 2% next year and 1.5% from the current 3%, the real problem for the zone is that the slump will build pressure for more spending cuts and tax rises to keep deficits and debt falling.

Outside economics, that’s known as a vicious circle. One that comes with a huge cost in human terms.

The rate cut — the second in as many months — returned the ECB’s key lending rate to the record low 1% that prevailed before the central bank’s two disastrously ill-advised rate rises driven by Draghi’s inflation-obsessed predecessor as head of the ECB, Jean-Claude Trichet. In his media conference, Draghi said that policymakers currently see “substantial downside risks to the economic outlook for the euro area” in an “environment of high uncertainty.” After the Draghi comments, Italian and Spanish 10-year bond yields rose more than 0.20%, climbing to 6.4% and 5.8%, which are worrying levels. They could climb further if tonight’s meetings are judged to be a damp squib.

But don’t expect anything too dramatic because German Chancellor Angela Merkel warned us not to from the first round of meetings in Brussels. She sees it as yet another step towards something concrete, but the way markets reacted, there might not be enough time for that to emerge. The rest of us are interested in solutions from European leaders, not processes.

The best that probably be hoped for tonight is a concrete, plausible plan to restructure the eurozone (at least) so that the conditions that helped create the crisis aren’t repeated. Wider EU reform is hostage to the domestic politics of Britain and other recalcitrants. This morning there were unconfirmed reports of agreement on tighter fiscal rules, but the British were approaching the summit holding their noses rather tightly and promising to veto pretty much anything that wouldn’t pass muster with the Tory backbench — which isn’t a lot.

At some point, many commentators have assumed, some event would precipitate the culmination of the crisis and the collapse of the euro. But the longer it goes, the more it seems the euro will end not with a bang but with a whimper — a long, drawn-out process involving months and probably years of stagnation, austerity and indecision.

Peter Fray

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