One of the unforgettable characters in a famous German children's book is a phantom giant. Seen from afar, he looks like a giant. But the closer you get, the smaller he becomes. In Michael Ende's Jim Knopf, the phantom giant turned out to be an old man of average height with a long beard.

Whenever I hear about European Council resolutions, I am reminded of that man. Each of the Council's crisis resolution strategies has looked impressive.

The agreement reached on March 11 not only appeared comprehensive, it also came as a surprise. Unfortunately, when you look from closer up the agreement begins to look smaller. By the end of the week, it crumbled.

The most blatant phantom giant is the European stability mechanism, which will be the permanent crisis mechanism from 2013. When it was announced that the ESM would be allowed to buy bonds in primary markets, this looked like a big concession. I was temporarily fooled. It turns out the primary market claim is a scam.

The ESM will not be in a position, for example, to support Portugal in the next few months, when the country needs to roll over large chunks of debt. If Portugal cannot refinance itself, it will have no choice but to accept a standard programme of credit support under the current rescue umbrella. Only after a few years, when a lean and transformed Portugal emerges from austerity, might the ESM be willing to help by acting in a small number of bond auctions as a purchaser of last resort.

Insignificant

What about the decision to accept a heightened lending ceiling of €500 billion (Dh2,602.7 billion)? Is that not substantial? Is it not a higher effective ceiling than that of the current mechanism? Not really. Had the ESM been allowed to operate freely in the primary and secondary markets, it would have been significant. But, with its operations constrained, the ceiling is not nearly as important. If you were intent on clipping the ESM's wings, the smartest way would be to limit what it could do with the money. The agreement looked large but was small.

The second phantom giant is the renamed "pact for the euro". It was supposed to change the fundamental operating rules of the Eurozone by accepting the need for policy co-ordination in a number of new areas of macroeconomic policy. It took only a few days for this promise to be exposed. After Japan's nuclear accident, the otherwise pro-nuclear Chancellor Angela Merkel made a snap decision to switch off seven German nuclear reactors. Energy policy itself is not part of the co-ordination process, but considering the macroeconomic importance of that decision on energy prices and inflation, this would have been an ideal occasion to test the Eurozone's willingness to co-ordinate policy.

I know of at least one government that, to its dismay, learnt about the decision from the media. The European Union and its members are as yet unprepared for the brave new world of policy co-ordination.

A third phantom giant is the newly reinvigorated stability and growth pact. The euro is only 11 years old but is already on its third pact after the failure of two predecessors. The main idea behind the reform is to give teeth to the sanctions procedure to enforce fiscal discipline — the lack of which Europe's policy elites consider the fundamental cause of this crisis.

Resolution strategy

Leaving aside the merits of that proposition, the pact is very likely to fail in the future for the reason its predecessors failed in the past. Jean-Claude Trichet, president of the European Central Bank, has been saying time and again that sanctions procedures should be automatic. We know from experience that the heads of state and government are too interdependent. They need each other. They do not slap sanctions on one another. Could you imagine the Council fining France?

The fourth phantom giant is the promise of a comprehensive bank resolution strategy. The bank stress tests that are taking place this year have the same weaknesses as last year's discredited ones. There will be no sovereign default assumptions for the banking book and, to underline the cynicism of the entire exercise, Germany has not even prepared for a new restructuring fund to deal with possible recapitalisation. Since Germany refuses to apply the capital adequacy rules of the new Basel III agreement, the banks are all very likely to pass the tests with flying colours. The readiness to repeat mistakes is astonishing.

The Council's priority is to triangulate domestic political interests, while managing news headlines. They are getting good at this. But they still have no crisis resolution strategy. This is why I am sceptical about the pledge that they will do "whatever it takes" to save the euro. That may turn out to be the ultimate phantom giant.

— Financial Times