'Merkozy' agreement to calm markets?

Greater 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?