Yet again, investors found themselves watching Europe last week - no surprises there - and were apparently pleased with what they saw. Word of a "new deal" incited a rally in stocks Friday that pushed the Dow Jones industrial average up 187 points, or 1.6%, the S&P 500 up 21 points, or 1.7%, and the Nasdaq up 50 points, or 1.9%.  All major domestic indexes finished positive for the week on a wave of optimism.
 

What is this "new deal" everyone's talking about? Basically, the 17 nations that use the euro agreed to sign a treaty that allows a central authority to oversee their budgets more closely. The agreement is made up of fiscal rules designed to prevent countries from veering further into crisis mode, and to rescue them if they do.
 

At least that is the theory. Now for reality.  When the Euro was formed there were "fiscal rules". There were two problems with those fiscal rules.  The first problem was that many countries played games with the fiscal rules to hide the true condition they were in.  The other problem was that the rules were never enforced. 
 

Let me give you an example of the first situation.  In 1999 my son Luke and I were in the Netherlands. The Dutch were getting ready to join the Euro.  One of the "fiscal rules" was that unemployment could only be as high as X. Unemployment in the Netherlands at the time was higher than X so you know what they did?  They declared all of the unemployed people over X as disabled and walah (is that even a word?), all of a sudden the Netherlands unemployment rate was low enough that they qualified.
 

As I mention above, the second problem is that the rules weren't enforced.  The EU has always had limits on Debt to GDP ratios etc. Do you think that countries like Greece, Italy and the rest of the PIIGS just suddenly got into trouble?  No. Their Debt to GDP ratios have been too high according to the rules for years. The real problem is that the rules were never enforced like they should have been.
 

While Britain chose not to support the plan, the majority of EU members are hailing this as a new beginning. German Chancellor Angela Merkel expressed that Europe has "...achieved a breakthrough to a stability union. A fiscal union, or stability union as I call it, will be developed further, step by step in the years to come." And French President Nicolas Sarkozy confidently boasted, "We're doing everything we can to save the euro."
 

Whether this deal will be a new beginning for Europe, or turns out to be little more than political posturing, only time will tell. But this might give you a clue. The promises are being made by politicians! Now that we have had the weekend to digest the news of this agreement what do the markets think of the politicians promises?