After tough all-night bargaining, European leaders appeared to salvage what had seemed to be a summit teetering toward failure by agreeing early yesterday to funnel money directly to struggling banks, and in the longer term to form a tighter union.
The agreements at a EU summit in Brussels suggested Germany had yielded a bit on its insistence on forcing tough reforms in exchange for rescue money. That was a victory for Italy and Spain, who have said they have done a lot to clean up their economies, yet face rising borrowing costs.
Asian stock markets surged after European leaders agreed to the recapitalization plan and a tighter union. Renewed concerns about Europe’s debts have rattled investors worldwide amid fears they could threaten global economic recovery.
The importance of recapitalizing banks directly became evident when Spain asked for 100 billion euros (US$125.94 billion) for its shaky banks. Under current rules, the bailout loan had to be made to the Spanish government, which would then lend it on to the banks. However, having that debt on the government’s books spooked investors, who began demanding higher interest rates for lending money to the government.
Lending the money directly to the banks would avoid putting that debt on the government’s books.
In addition, the leaders agreed EU countries following budget rules could apply for bailouts that would not come with the stringent conditions that have accompanied previous EU bailouts — a recognition, said Italian Prime Minister Mario Monti, who pushed for the deal, of the work such countries were already doing in reforming their budgets.
EU leaders agreed on Thursday night to devote 120 billion euros in stimulus to encourage growth and create jobs. France had pushed for the growth package, saying that austerity measures imposed to stem Europe’s debt crisis were stifling growth and making it worse.
German Chancellor Angela Merkel said after the meetings broke up soon before dawn that she was “very satisfied that we took good decisions on growth.”
European Council President Herman Van Rompuy said leaders of the 17-nation eurozone also agreed to a joint banking supervisory body. He also said the leaders of the full 27-member EU agreed to a general long-term plan for a tighter budgetary and political union.
The leaders agreed on “the four building blocks” of a tighter EU — but said they would not start pinning down details until a report in October.