The European financial crisis has entered a new phase with the Brussels Summit of the European leaders earlier this month throwing some new twists and turns to this long saga. The summit was widely thought to be a major milestone in the European countries' battle with the ongoing sovereign debt crisis and their efforts to save the Euro as the common currency of 17 countries of the common currency bloc.

The Brussels Summit was dominated by the leaders of the two largest economies in Europe: Germany and France. This Franco-German combine was the axis around which the deliberations and the final outcome of the summit revolved. German Chancellor, Angela Merkel, and French President, Nicolas Sarkozy, maintained their positions as being in favor of making large-scale changes to some of the fundamental treaties of the common currency bloc.

A stronger fiscal union
They made it clear that in order to restore confidence in the single currency bloc and in order to maintain stability in the bloc a much stronger fiscal union is a must, whereby the member countries' economic and fiscal policies would become much more coordinated and disciplined than it is today.

An agreement to create this so-called "fiscal compact" was the single most important outcome of the Brussels Summit. It was also agreed that for the purpose of bringing about this "fiscal compact", some major structural changes should be made to the founding treaties of the bloc involving modifying and changing national laws in member countries in favor of creating a tighter fiscal union. It was also recognized and agreed that the member countries of the currency bloc should move beyond only 'agreements' and work towards actual implementation of these agreements.

The United Kingdom has decided to stay away from the deliberations. This, after all, fits into a historical pattern wherein the U.K. has favored its trans-Atlantic ties with North America over its ties with its European peers.

In previous talks, the U.K. and its Prime Minister, David Cameron, had made clear their concerns about new proposed rules that would constrain and possibly harm the City of London (London's financial district) as it is one of the most prominent financial centers in the world and a significant source of national income for the U.K.

The British financial industry is closely tied to the American financial industry and the Wall Street. This fact is one reason among many for the close and the "special relationship" between the Trans-Atlantic partners, the U.K. and the U.S.

In the Brussels Summit, Germany and France, the two European heavyweights, initially put forward two different approaches to structurally altering the bloc's treaties. Germany, as it has been its long-held position, favored a strictly non-political mechanism of automatic sanctions for any country that is found to be in the breach of the new set of proposed fiscal rules.

For example, if any European country is found to be running an annual budget deficit of more than 3% of its Gross Domestic Product, then according to Germany's proposals, corrective and punitive measures including possible sanctions would be automatically applicable to the erring country.

On the other hand, France was in favor of a less rigid and more flexible approach to creating a tighter fiscal union. French President, Nicolas Sarkozy, insisted on a political approach to be taken in relation to enforcing and supervising the implementation of the new sets of fiscal rules.

In the end, the final plan that both the countries agreed to and now will be sold to the rest of the currency bloc's member states, envisages tight budgetary and fiscal discipline. National governments will be required to pass legislation in their respective national legislatures to ensure that national budgets are either balanced or are in surplus.

National budget deficits of only between 0.5% to 3% of GDP will be tolerable. The deal also envisages that the European Commission, as the executive arm of the European Union, will be equipped with power to pull up and impose punitive measures on those erring countries that run excessive budgetary deficits.

The European Central Bank (ECB), headquartered in the German city of Frankfurt, has so far resisted calls and pressures to enter into the fray and push down the borrowing costs for some of the member countries in trouble such as Italy, Spain and Ireland.

The European Central Bank, as it is the duty of any other central bank, has the powers to engage in Open Market Operations (OMO) and buy the sovereign debt of these troubled member countries. Italy's borrowing costs has been steadily rising to new heights and the European Central Bank has only been standing in the sideways as a spectator.

What has been exacerbating the Euro crisis is the perception that the politicians in the Eurozone have been unable to deliver their part of the bargain. They have lacked the vision and the courage to take the necessary bold and painful decisions needed to uphold the idea of a union and a single currency bloc through introducing the required reforms.

The situation in the Eurozone remains grim. As said, the banks and other financial institutions in Europe remain under-capitalized and vulnerable. Many of them such as the German and French banks are heavily exposed to the debt of other underwater countries such as Greece and Portugal.

These bankrupt countries can no longer service their debts (pay the interest on the original sum of debt) let alone pay the original sum borrowed. "Rolling over" debt instruments as they come due is a widespread strategy but these countries such as Italy find it increasingly more difficult to "roll over" their debt since new sources of borrowing are becoming increasingly expensive.

Will the Euro survive?
Reactions to the new agreements made in the recent Brussels summit have been rather cold. The deal created no excitement and frenzy in the financial markets and the observers. Everybody can remember the agreements and the deals made around two months ago in another Euro summit – a deal which lived no more than few weeks before collapsing and its provisions forgotten.

The long string of past failures and broken deals have made many, including many in the financial markets, not to take very seriously this latest deal. On the other hand, what has been agreed in this deal needs to be first ratified by each member country's national legislature before it can be implemented.

Saving the Eurozone intact without some of its weaker member states having to exit the bloc is rather an impossibility. In any likelihood and despite the recent deal and all the assurances of return of stability and confidence, the weaker countries such as Greece and Portugal will indeed have to leave the common currency bloc at some point in the future. This, in fact, amounts to a partial collapse of the common currency bloc.