The International Monetary Fund’s most weighty publication, the “World Economic Outlook,” launched its latest edition on the topic of “Coping with High Debt and Sluggish Growth” on October 9 in Tokyo during its annual world summit. Most of the content is dedicated to the world’s worst economic performer: Europe. It bashes the foolishness of the EU’s macro-economic policies, namely the “austerity for all” principle behind the recently agreed Treaty on Stability, Coordination and Governance (TSCG) in the EMU and urges Europe to reverse it by adopting symmetrical expansionary and austerity policies to its members according to their competitive position.

Wolfgang Schaeuble, the Finance Minister representing Germany, swiftly refused to budge and reaffirmed the European orthodoxy. However, just two days after the end of the Tokyo conference, Chancellor Angela Merkel seemed to announce a complete reversal of German policy, calling German bosses to increase wages over the rate of inflation and pledging for breaks in taxes on labor income, well in line with the IMF recommendations.

Were European leaders finally starting to listen? Would we finally see a reversal of policies at the European Council in Brussels on October 19-20?

The day before the start of the European Council, the press announced that for the first time in several years this summit would not repeat the litany of budgetary recommendations for fiscal austerity; that promise however, was not kept. Although less verbose than usual, the final press declaration indeed contains the usual budgetary restraint prescriptions for Greece.

On the second front of the battle – the political justification for the European Central Bank to pump money into the European economy – progress was also very limited. Whereas the Council interim report spoke at length of “developing gradually a fiscal capacity for the EMU” the final declaration only speaks of the European banking supervision, the so-called “Single Supervisory Mechanism (SSM),” and the need to separate it from ECB’s monetary responsibilities as well as the will for the whole of this to be settled by December.

The crux of the matter is indeed the ECB’s monetary responsibilities, namely its ability to lend money at acceptable interest rates in exchange for austerity measures, but nothing came out of the summit on this regard.

A considerable uproar in the press followed, citing references by Chancellor Merkel to the need to give the European Commission the power of prior approval to national budgets, the so-called “Two pack” as it is known in “Euro-speak.” The uproar surrounding this is not justified as it has been in the legislative pipeline for some time and is already being applied ex-ante by the troika (the debt program committee made up of the European Commission, the European Central Bank and the IMF) in countries like Portugal.

The biggest deception of the Summit, however, came with the absence of recommendations on the newly created mechanism of the “excessive imbalance procedure” whose operation started last July.

With this procedure, European institutions admit that the problems of EMU are not necessarily the result of budgetary decisions, but can result from other macroeconomic imbalances. In other words, the European institutions depart from the Maastricht Treaty’s ideological framework (that governments should only worry about public deficits; other imbalances are virtuous) as restated in the TSCG and consider external account imbalances – financial bubbles, price inflation of labor or real-estate and other factors associated with the external imbalances – to be the central concern for the stability in the EMU, much in line with elementary economics or indeed with the present recommendations of the IMF.

As it is apparently now starting to be accepted by the European leaders and associated bureaucracy, the problems of the EMU do not come only or even mainly from the budgetary profligacy of some of its Member States, but from external accounts imbalances that made the Euro-area a very odd collection of countries, mixing those with very high external account deficits with those in the reverse situation.

While property price booms, soaring labor costs and irresponsible lending led to record levels of private and public indebtedness in the European periphery – external indebtedness is exactly the sum of private and public indebtedness – rigorous competitiveness policy in countries like Germany led to the opposite situation.

In the pre-Euro era these situations occurred often, and the ensuing crises were swiftly sorted out through currency devaluations/revaluations. However, the single currency meant deflation in the deficit countries and reflation in the surplus countries was now the only way to remedy these imbalances, and this is the essence of what the IMF 2012 publication reminded us of.

European institutions seem to think that the pace of their heavy bureaucratic machinery can efficiently replace what the swift movements of the money valuation mechanisms did in the past.

Furthermore, the underlying assumption is that this overly centralized Brussels-based system of budgetary regulations, decisions and penalties can be compatible with a vibrant European democratic and responsible society.

I think European institutions are wrong on both counts and that Europe is bound to fail if it does not change its ways, adopting a model where guidelines are set, structural action is offered and corrective support is available at a cost (broadly, this is what goes on at the world level) but where no-one wants to micro-manage everything from a distant center by an intractable regulatory nightmare.

Notwithstanding this, the Euro-crisis cannot be seen as the source of the global economic crisis, and the sorry state of the United Kingdom’s economy – the most important EU member outside of the Euro-zone – is a good reminder of this fact.

The institutions that manage our world economy are indeed broadly the same as those that were brought to life in the Bretton Woods era or soon after. A fundamental change took place starting with the end of the US dollar convertibility: the world system is no longer managed by Western treasuries or central banks but by immense masses of “tax haven” money, petrodollars plus former Tigers and new Dragon authorities.

To reinvent the economic world system, giving it coherence and clarity while preserving the values so dear to us, is a necessary condition for the world to overcome its present crisis. This is yet more important than a successful EU summit.

Paulo Casaca, founder and executive director of the Brussels-based NGO Alliance to Renew Co-operation among Humankind, has been a MEP from 1999 to 2009 and a Councillor of the Portuguese Permanent Representation from 1996 to 1999. He has taught economics at the University of the Azores and the University of Lisbon, and has served as an economics adviser to the Socialist Group in Portugal. Paulo was a member of the Portuguese National Parliament and the Azorean Regional Parliament. Read other articles by Paulo.