'Merkozy' agreement to calm markets?

Merkel and SarkozyGreater budget stringency and penalties should national deficits over-run, plus a new treaty to ensure that all eurozone governments toe the line. In essence, that's the deal agreed by Angela Merkel and Nicolas Sarkozy.

But this difficult consensus has now been hit by the threat of a new eurozone downgrade from Standard & Poor's, putting nearly all the eurozone states on "credit watch". How serious is this development?

A German force-march?

German Finance Minister Wolfgang Schaeuble claims this threat is the "best possible incentive" ahead of Friday's important EU Brussels summit where Germany will surely be thumping the table for greater fiscal integration.

Some claim the new S&P downgrade threat is heavily backwards-looking and tactless - which is true. But though the S&P verdict appears lumpen, it's a fine stick for Wolfgang Schaeuble and Angela Merkel to swish about the air on Friday in Brussels.

Then, once a Merkozy Big Deal - or Big Merk - is done, we're likely to see European Central Bank boss Mario Draghi start talking about ECB funding, with some support from the IMF (though this is possibly illegal given that the IMF is supposedly barred from funding countries that may not be able to pay it back). Then, the bazooka is set for firing; cue lots of banker celebrations.

Big Merk

And with all this decided - if it's decided - where does that leave Cameron and Osborne? Decidedly on the outside of events. But it's only Tuesday, and a lot may change before the weekend.

The deal, practically, will mean large losses of sovereignty for many countries. A grand deal has to be agreed given the fear of euro collapse and the terror of what would follow: eurozone-wide recession attached to massive break-up costs.

But it's difficult to tell if such an agreement would be a game-changer, or another breather before before the markets get restive again, worried the underlying economic problems are too large to absorb.
Read Full Story