Europe Summit Surprises With Bold Moves

German Chancellor Angela Merkel
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By DON MELVIN and TOBY STERLING, Associated Press

BRUSSELS (AP) — After 18 disappointing summits since the start of the debt crisis, Europe's leaders appeared Friday to have finally come up with quick fixes and long-term plans that show they are serious about restoring confidence in their currency union.

Global markets breathed a huge sigh of relief. Debt-saddled Italy and Spain appeared victorious and Germany's Angela Merkel faced potential criticism at home for conceding to pressure for an immediate deal.

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The leaders of the 17 countries that use the euro agreed to:

—Pump money from two European bailout funds directly into troubled European banks later this year, rather than make loans to governments to bail out the banks. The move rescues banks without putting strapped countries deeper in debt.

—Use bailout money "in a flexible and efficient manner to stabilize" European government bond markets. That suggests that money will be used to buy government bonds, which should ease the pressure on countries like Italy and Spain.

—Let "virtuous" countries tap European rescue funds directly without submitting to stringent bailout programs.

—Tie their budgets, currency and governments ever tighter in a vast new economic union down the line.

European Council President Herman Van Rompuy called it a "breakthrough." Financial markets appeared to agree — global stocks and the euro rallied hard, and the pressure on Spanish and Italian bonds eased markedly.

Concerns remain though.

Most of the measures approved in the Brussels summit will take months to come into force. The €500 billion ($634 billion) firepower of the EU's future permanent rescue fund, the European Stability Mechanism, or ESM, may not be enough — Italy alone has outstanding debt of €2.4 trillion.

And given how shaky the public finances of Spain and Italy are, and how jittery markets have been, the crisis could flare up again.

But some key points will kick in within 10 days: On July 9, eurozone countries will strike a deal governing Spain's banking bailout and allow the temporary bailout fund to directly purchase Spanish government bonds.

In the markets, the summit decisions have been hailed as a victory for Spain and Italy, whose borrowing costs have risen to near unsustainable levels despite their efforts to cut spending and reform their economies.

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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 separate decision allowing countries that have reformed their economies easier access to bailouts, without such stringent conditions, 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.

Van Rompuy dismissed talk that Merkel had lost in the negotiations.

"It was a tough negotiation," Van Rompuy said. "It took hours yesterday. And you can't summarize this in winners and losers."

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 union, 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 Jean-Claude Juncker, the Luxembourg prime minister who chairs the eurozone finance meetings.