Eating le Pudding

puddings on display Image copyright Other
Image caption Will moves in Europe satisfy appetites?

The proof of the pudding is in the eating - one of the favourite expressions of non-native English speakers.

Christine Lagarde, former French finance minister now newly installed atop the International Monetary Fund, was applying it to the deal struck in Brussels last night.

And the proof she has in mind is whether the deal was enough to satisfy the appetite of the bond markets for targeting the vulnerable underbelly of economic fundamentals.

She said the deal was "a game-changer". But if it were, you might expect something more than the caution we've seen in the markets the morning after the evening deal before. It's been rather less ecstatic than the talk of historic breakthrough on Brussels' Rue de la Loi.

Much has been written elsewhere about the deal. I'll emphasise only three points.

One is the confusing message. On one hand, Greece is in a uniquely grave situation. President Sarkozy emphatically states the special measures will not be repeated for any other country.

Yet the opening sentence of the agreement says: "We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its member states".

"Whatever is needed"? What if a Greek-style bailout is needed by others, President Sarkozy?

The bond traders who have already punished the eurozone for the uncertainty of its resolve must still be wondering whether the German-French alliance at the heart of the eurozone is standing behind Irish, Portuguese and Spanish debt, or not.

Growing pains

Second is to highlight the distance travelled in 18 months of eurozone crisis from a punitive attack on those who had failed to stick to the stability rules and who had become bloated with debt.

First Greece, then Ireland, followed by Portugal, Spain and most recently Italy have been told to take unpleasant medicine, dressed up as "fiscal consolidation" and "structural reforms". To most people, that means spending cuts, tax increases, weakened welfare and labour protection and lots of privatisation.

That approach has not been changed. But the agreed text from Brussels yesterday was full of praise for these countries taking the necessary measures. Instead, it acknowledges that isn't nearly enough.

It seems the eurozone's leaders now realise - perhaps rather late - there's a tough political sell to keep the Euro-Plus Pact from spilling into ugly street protests. It's not enough to leave profligate southern countries sitting on the naughty step.

And crucially, they've also realised that being punitive with deficit-cutting and debt-reduction is of no use at all if that pitches economies into rapid contraction.

Greek relaunch

There are some who think that sharply applied austerity measures can provoke, inspire or whiplash people into growing the economy to fill the gap left by the government and to pay the taxes to bring down debt.

That's the hope at the heart of the UK government's strategy. It's possible, but there's not much evidence to bear out that theory.

So the leaked draft of yesterday's communique talked of a Marshall Plan to help Greece back to growth. The reference to America's huge stimulus for Europe after 1945 was, however, absent from the final document.

Instead, it seems eurozone members are to put a bit of effort into helping Greece grow. The eurozone members will "relaunch the Greek economy". That sounds a task better suited to Helen of Troy.

Other member states and the Commission will "immediately mobilise all resources necessary..." Wow! This sounds impressive. But hang on: "... to provide exceptional technical assistance to help Greece implement its reforms".

Image copyright Reuters
Image caption What future does the euro have?

It seems Brussels is mobilising its best economists. Hardly the Marshall Plan.

Third, Ireland. It is benefiting from getting longer to pay and reduced interest rates on the bailout package already agreed, which ought to save it around 700m euros per year.

With its economy still pinned back, Ireland needs that kind of help, and will want the special UK loan to be similarly treated.

But unlike any other element of the summit agreement, it goes out of its way to say Ireland is willing to participate constructively in discussions on changes to the corporate tax base.

That's euro-speak for Ireland being told it has to put its 12.5% business tax on the table for negotiation leading to an increase, having previously said it was a red line issue. In Dublin, that tax rate is seen as the key to driving the economy and attracting inward investors.

Other eurozone members would dearly love to see taxes converge, removing the advantage Ireland has. The leverage of the bailout package and the move to a much more closely aligned fiscal regime is proving the means to achieve that.

That reads across to Scottish politics, where the SNP government sees Ireland's low business tax model as the key to a more autonomous Edinburgh government driving Celtic Tiger growth rates.

As I wrote earlier this week, it seems very unlikely the UK Treasury would let that happen with Scotland inside the UK.

And were it to be outside the UK, it is ever more unlikely that Scotland would be allowed that freedom by its European partners.