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Markets the Acid Test of Summit Success and Leaders' Fortunes

We will soon know if the markets are satisfied with EU's good intentions or if we face a rerun of previous summits.
By Amiel Ungar
First Publish: 12/11/2011, 11:45 PM

The agreement reached by at least 23 European Union members at their summit in Brussels over closer fiscal union and centralized budgetary oversight will be tested by the markets.

The prospective agreement adheres to the well founded principle of when in a hole, stop digging. The new safeguards against budgetary imprudence will prevent the accumulation of new debt, but still raise the questions of how and by whom the massive current debt will be serviced.

Likewise, they have no prescription for the restoration of growth. The previous EU yardstick under the Growth and Stability Pact set a ceiling for government deficits at 3% of GDP. This assumes a modicum of growth in each economy. What if there is zero or negative growth? Will the budgets be scaled down amidst further austerity?

The previous fixes that left the question of how the current debt was going to be paid evaporated quickly after the financial markets effectively voted no confidence in them. If the markets are sufficiently forgiving to allow a solution to take shape, the summit can be deemed a success. If there is a spike in interest rates, it will be back to the drawing board for the euro zone members.

The situation involving Britain is interesting, as it has boosted the personal popularity of Prime Minister David Cameron to over 60% in a country where Euroskepticism is mainstream. It has also made him a hero within his Conservative Party, earning him adulation from those who but a short time ago were comparing him with Neville Chamberlain for selling out Britain to the European Union.

It has however exacerbated fissures with the Liberal Democratic coalition partner and has even elicited public criticism from David Cameron's deputy Nick Clegg, the Liberal Democrat leader. If the Liberal Democrats decided to violate the coalition agreement, they could bring down the  government. Neither party to the coalition wants elections that would benefit the Labour Party.

The familiar electoral map of Britain has resurfaced in the polls,  that show Labour substantially ahead in the North and in the Midlands, about even in London and trailing the Conservatives in the Sourth but overall with a 7% lead in the polls.

In Scotland, where there are more giant pandas than Conservative members of Parliament, the disparity becomes greater. The Liberal Democrats are down to 8% in the polls and would absorb a total thrashing if they went to elections now.

French President Nicolas Sarkozy could presumably be regarded as the big winner of the summit in achieving financial centralization, a  centralization that will be at least outwardly administered by national laws rather than by the European Union (something that Britain has blocked). As of yet the French president has not received a bounce in the polls for his efforts and emerges as a definite loser when  French voters are asked to register their choices for the second and decisive ballot.