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Europe's New Pact

German Chancellor Angela Merkel at the EU summit Friday. Yves Logghe/AP hide caption

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Yves Logghe/AP

The new Europe everyone's been waiting for was born early this morning. European leaders will present the new fiscal pact to national parliaments over the coming months. Here are the three parts, summed up with help from the Peterson Institute's Jacob Funk Kirkegaard; they are ordered in terms of loss of sovereignty, from least to greatest:

1) New rules. Each country has to rewrite its constitution to say that it will have balanced budgets. Balanced budgets aren't already required in national constitutions because some countries want a little flexibility— the term of art is counter-cyclical stimulus—- when there's a recession. That means they want the ability to overspend when times are hard, and then, theoretically, cut back and shore up when times are good. The new deal says that's no longer an option for anybody. Everyone's budget needs to be balanced every year.

2) Check your work. Countries need to submit their national budgets for vetting by the other member countries. So before the budget goes before a national parliament, it's sent to Brussels, where a bunch of technocrats check it out. If they like it, it gets sent back to the country from whence it came and is voted on (and is, presumably, passed).

3) Punishment by percentages. If a country has more than a 3 percent deficit (and a lot of them do) as a percentage of GDP, automatic sanctions will be triggered. Unless 85 percent of the euro-area countries vote to undo the sanctions. But the votes are weighted — the country with the biggest economy gets the most votes. That would be Germany, lover of rules and sanctions and accountability. So it's gonna be hard to get out of getting sanctioned.

At this point, you might ask— can this deal get through all 17 parliaments?* But that's not the most urgent question. The question is, does the European Central Bank like this deal? Does it like it so much that it will vastly step up lending and drive down borrowing costs of the struggling countries? European Central Bank Chairman Mario Draghi immediately said, 'Yes, I like this.' He did not say that means the ECB will start lending those countries vast amounts of money.

The European Union leaders also agreed to send 200 billion euros to the IMF, which would channel that money back to the indebted countries. That's still not enough to bail out Italy and Spain, should they need it. Which is why, despite the hoopla, all eyes remain focused on the ECB.

*Can it? Probably. The Irish might hold a referendum on it though — they're the most referendum-prone of the euro countries. And that could slow things down quite a bit.