Europe summit surprises with bold moves

By Toby Sterling

Associated Press

Published: Friday, June 29 2012 6:36 a.m. MDT

European Council President Herman Van Rompuy speaks during a media conference at an EU Summit in Brussels on Thursday, June 28, 2012. European leaders gathering Thursday in Brussels are set to sign off on a series of measures to boost economic growth but expectations of a breakthrough on the pooling of debt have fallen by the wayside.

Virginia Mayo, Associated Press

Enlarge photo»

BRUSSELS — After 18 disappointing summits, Europe's leaders appeared Friday to have finally come up with a set of short-term measures and long-term plans that show they are serious about solving their crippling debt crisis.

Meeting for the 19th time since the debt crisis exploded, leaders of the 17 countries that use the euro currency agreed they will let funds intended to bail out indebted governments funnel money directly to struggling banks as well. They said the move will "break the vicious circle" of bank bailouts piling debt onto already stressed governments.

European Council President Herman Van Rompuy called it a "breakthrough."

The decision is a victory for Spain and Italy, whose borrowing costs have risen to near unsustainable levels despite their efforts to cut spending and reform their labor markets.

In Germany, Chancellor Angela Merkel is likely to face a grilling from a skeptical German Parliament later. Heading into the summit, Merkel had stuck to her line that any financial help from Europe's bailout fund must come with tough conditions, so a decision allowing easier access without countries was widely seen as a defeat by the German press.

Merkel insisted the funds would still only be released when it was clear countries were undertaking serious reforms.

"We remain completely within our approach so far: help, trade-off, conditionality and control, and so I think we have done something important, but we have remained true to our philosophy of no help without a trade-off," Merkel told reporters in Brussels.

Leaders of the full 27-member European Union, which includes non-euro countries such as Britain and Poland, also agreed to a long-term framework toward tighter budgetary and political uion, though those plans will require treaty changes and won't be realized for years.

The scale of the moves were unexpected and provided investors a reason for optimism, even as analysts cast doubt on the plans' feasibility and noted that some fundamental problems with the common currency remain.

"I think the elements we put together will reassure the markets," said Eurogroup President Jean-Claude Juncker.

Mario Draghi, the head of the European Central Bank, was similarly optimistic.

"I'm actually quite pleased with the outcome of the European Council," Draghi said. "It showed the long-term commitment to the euro by all member states of the euro area. But also it reached tangible results in the shorter term."

He cited in particular the waiver of the ESM's preferred creditor status for Spain and the future possibility of using ESM for direct recapitalization of the banks, which is something that the ECB had advocated for some time.

But he said strict conditionality was essential to the program's credibility.

Stocks around the world surged Friday, with markets in countries on the front line of the crisis doing particularly well. Italy's FTSE MIB and Spain's IBEX indexes each rose 3 percent.

Perhaps more importantly, the yield on Spain's 10-year bond dropped by 0.32 percentage points to 6.58 percent. Italy's was down by 0.14 percentage points to 5.94 percent. Both countries have seen their rates edge toward the 7 percent level which is seen as unsustainable over the long term.

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