The summit of Europe's deception

Has French president Franois Hollande already conceded defeat in the face of German chancellor Angela Merkel's implacable obstinacy?

That's the question that southern European leaders will be anxiously pondering, as they head towards a crucial European summit later today.

Will Hollande, who until now has been the undisputed champion of growth in Europe – pushing for the creation of ‘eurobonds', and for the European Central Bank to buy more Italian and Spanish bonds – continue to hold out against Berlin's intransigence? Or will he give in to Merkel's insistence that countries such as France, Spain and Italy must agree to closer supervision of their budgets and banks if they want German taxpayers to shoulder their debts?

Certainly, Hollande's comments after pre-summit talks with Merkel last night suggest that he's watered down his combative stance, and now appears ready to hand over more budgetary control to Brussels.

At a convivial joint press conference, Hollande said that both he and Merkel wanted to "deepen the economic and monetary and, tomorrow, political union to achieve integration and solidarity”. The only sign of his earlier defiance was his caveat that this should be "integration as much as necessary and solidarity as much as possible".

Merkel, meanwhile, was careful to dampen speculation that tonight's summit could result in major new initiatives, such as eurobonds, for solving the region's debt crisis. Instead, she noted that she and Hollande had made "significant progress” on working out a "growth pact”, which she hoped would be endorsed at the summit.

Her comments will come as a huge disappointment to Spanish Prime Minister Mariano Rajoy, who last night pleaded with Hollande and Merkel (or ‘Homer' as they've been dubbed) to adopt "urgent” measures to reduce his country's borrowing costs. "We can't finance at current prices for too long," he warned Spanish parliament. "There are many institutions and financial entities that have no market access. It's happening in Spain, it's happening in Italy and in other countries, that's why this is a crucial issue."

Rajoy, and Italian leader Mario Monti, had been counting on Hollande to take a tough stance with an increasingly isolated Merkel, and to resist Berlin's detested 'budgetary pact' that forces eurozone countries to balance their budgets, and which risks plunging their countries deeper into depression.

They were hoping that Hollande would strong-arm Berlin into giving the green light to 'eurobonds' – bonds jointly guaranteed by all eurozone countries – which would allow Italy and Spain to reduce their borrowing costs. And they were praying that Hollande would restore the region's competitiveness by reducing the value of the euro through a massive monetary easing. Not only would the European Central Bank cut official rates, it would also buy up huge quantities of Spanish and Italian government bonds, which would cut Italian and Spanish interest rates.

But now, after a few thunderous threats from Merkel, Hollande appears to have folded.

Instead of renegotiating Merkel's 'budgetary pact', as he promised during the French presidential campaign, Hollande appears to be content to tack on a 'growth pact' which aims to boost the region's growth by investing €120 billion ($US150 billion) in major European projects.

The only problem is that this 'growth pact' is unlikely to generate much growth at all. The amount involved – €120 billion – represents less than 1 per cent of the eurozone's GDP. Even worse, almost half of the money involved – €55 billion – comes from redeploying structural funds, which were due to be spent anyway between now and 2014. And the rest of the money – €60 billion in extra loans from the European Investment Bank and €4.5 billion in project bonds – will be stretched out over several years, reducing the impact on growth.

Even worse, the extra lending is unlikely to generate additional investment. The eurozone's biggest problem is not that companies lack money to invest.On the contrary, many of the region's big companies are awash with cash, and are handing back money to shareholders.

Italy's Monti and Spain's Rajoy know that Merkel's austerity program is pushing their countries ever deeper into depression, and were pinning their hopes on Hollande to change Berlin's tack.

Instead, Hollande appears to have decided that his best course of action is to try to reach a ''compromise” with Merkel, and to package it as the latest panacea for the eurozone.

It's unlikely to deceive markets, or voters, for long.