The ESM is designed to reassure investors that the EU is better equipped to contain whatever crises erupt in the eurozone.
"Today is a good day for Europe," said Juncker, who is also chairman of the ESM's board of governors, as well as prime minister of Luxembourg.
The ESM will eventually replace a temporary bailout fund, known as the EFSF, but the two will overlap for the time being while the EFSF continues to handle the bailouts of Greece, Ireland and Portugal.
The new fund will eventually have €500 billion at its disposal that it will use to buy the bonds of countries whose borrowing costs are becoming unmanageable and to lend money to them if that is not enough. It will also lend money to countries that need to prop up failing banks, including handling Spain's bank bailout. It is expected that the fund will eventually be able to lend money directly to banks, without the government having to carry those loans on its books.
Currently, such rescues have to go through governments — and that puts an added strain on countries such as Spain that are already having difficulty reducing their debts.
The EU countries have agreed that the banks can receive direct recapitalization only once the European Central Bank is put in place as their supervisor, with broad powers to oversee — and sanction — them. But there has been disagreement over how fast that should happen.
France and others are pushing for the ECB to start supervising banks by the end of the year. But German officials say it can't be done that quickly and momentum has slowed on the project.
French Finance Minister Pierre Moscovici turned up the temperature in the debate on Monday night, saying that the supervisor had to be in place quickly and that once it's up and running, banks should be able to retroactively receive direct recapitalization.
"That's the letter and that's the spirit" of the leaders' agreement, he said. "I see no reason to go back on it."
Also during Monday's meeting, the finance ministers approved the release €800 million ($1.03 billion) in bailout money for Portugal. The remainder of the next €4.3 billion tranche of aid must be formally approved by the IMF and the full 27 EU finance ministers.
The decision had been widely expected — even though Portugal has said it would miss the targets laid out in exchange for the €78 billion bailout. Already, the foreign lenders have agreed to allow the country to reduce its deficit to 5 percent of its gross domestic product this year, rather than 4.5 percent.
Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.