Under intense pressure from Italy and Spain, whose borrowing costs have soared beyond the point of sustainability, the 17 countries that use the euro agreed Friday to lend European Union bailout funds directly to banks and governments, a step Germany had long resisted.
The accord, which came after marathon talks, was hedged with conditions and linked to putting new institutions in place over the coming months, among them a single European supervisor for banks in the euro zone. But top European officials called it a breakthrough, and markets soared around the world in an initial vote of confidence.
Interest rates for Spain fell a half point to 6.34 per cent, after topping 7 per cent in recent days, and Italy’s borrowing costs fell to 5.94 per cent. Stock markets in Frankfurt, Paris, Madrid and Italy registered daily gains of 2 percent or more, and the euro also climbed in value against the dollar.
Stocks also soared in the United States, with the Dow also up nearly 278 points, to close at 12,880.09.
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“We agreed on something new, which is a breakthrough,” Herman van Rompuy, the Belgian politician who is the president of the European Council, told reporters after the pre-dawn agreement was reached.
The new EU policy will allow the European Stability Mechanism, a new institution with functions similar to the International Monetary Fund, to inject capital directly into Spain’s failing banks, instead of through the national government, as soon as the all-European bank regulator is in place.
It will also allow countries such as Italy that have carried out austerity and reform measures but are still facing high interest rates to lower those costs by receiving loans from the ESM, which replaces an interim institution called the European Financial Stability Fund.
Mario Monti, Italy’s prime minister, and his Spanish counterpart, Mariano Rajoy, blocked the summit from completing any other business until accord was reached on the financing crisis.
"May I stress that Italy worked a lot and put a lot of pressure at the negotiating table for this result to be achieved," said Monti as he left the meeting, with a big smile. Rajoy, somewhat less ebullient, said the meeting "set out the correct path for confronting the crisis and marked out a road map."
German Chancellor Angela Merkel also portrayed the accord as a triumph for German demands for fiscal discipline and accountability, but coming just days after she had publicly sworn she to would not agree to “mutualize” the debt of EU member states “as long as I live,” there were many doubters.
“The government should explain its 180 degree turn,” said Carsten Schneider, a German budget expert who is a member of that country’s Social Democratic party.
Nevertheless, after flying back to Berlin from the summit, Merkel easily won a three-fifths majority in the Bundestag in support of the new ESM, an essential vote in support of the new European financial architecture that is emerging from the crisis.
Merkel, a physicist who born in what was then communist-ruled East Germany, was fresh and feisty Friday morning when she appeared before reporters to begin the second day of the summit. She strode directly to the rope line, declared “good morning,” and delivered a carefully scripted statement about the “important decision” she said had been made overnight.
She stated that a “super-regulatory body” had to be in place before the ESM injected capital into troubled banks, and there would be very careful controls before any funds were spent.
And before the ESM buys bonds or supports the borrowing market in any member, the EU will require a detailed analysis of the country’s finances by the European Commission, as well as a memorandum of understanding from the new country and outside supervision of its budget performance.
Thus, she said, German conditions had been upheld: performance according to the stated criteria, trade-offs, conditionality and strict supervision.
Asked later whether a single encounter with Monti at 3 a.m. had led to the breakthrough, she said she’d spoken with him 10 times, and “we also were busy with soccer.” Italy defeated Germany 2-1 in the European Cup soccer semifinals Thursday night, and the leaders apparently watched the game avidly.
Euro zone leaders also called for Rompuy to produce a timetable later this year leading to a far more complete European monetary union, which will encompass a banking union and institutions to coordinate fiscal and economic policy.
With the currency-related issues out of the way, the leaders of all the 27 EU countries signed off on two other accords.
The first established a single patent court, with headquarters in Paris, to adjudicate patent claims. Danish Prime Minister Helle Thorning-Schmidt, who presided over the EU council meeting under the EU’s system of a presidency that rotates every six months, said that with the court in place, inventors will be able to apply for patents at one EU location instead of 27, a step that should spur innovation and enterprise.
They also agreed to a “growth and jobs” package, which France’s newly elected president, Francois Hollande, had insisted on. It’s been described variously as a $150 billion or a $162 billion package, but there’s less than meets the eye, according to the fine print of the conclusions published by the European Council. Some $75 billion is being reprogrammed from other structural funds, and there will be only $13 billion in new funds, to be invested in the European Investment Bank, where it is anticipated to have a multiplier effect and lead to loans for as much as five times that amount.