Europe Hails ‘Breakthrough’ Of EU Summit

After a score of disappointing summits since the breakout of the debt crisis, leaders of Europe took surprisingly bold moves on Friday to calm financial markets and boost the embattled economy.

At the two-day summit, which ended on Friday afternoon, they decided on a package of measures worth some 120 billion euros (about $150 billion) to bolster growth.

Meanwhile, Eurozone leaders agreed to create a single supervisory body for its banks by the end of this year, which is seen as a first step towards a European banking union.

Most importantly, they reached a deal that the bloc’s rescue fund would be lent directly to capitalise banks without increasing a country’s debt level, which would bring down the mounting borrowing costs, especially for Italy and Spain.

Global markets appeared to have breathed a huge sigh of relief, with markets in countries on the frontline of the crisis doing particularly well.

Italy’s FTSE MIB and Spain’s IBEX indexes rose 5.3% and 4.6% respectively.

The yield on Spain’s 10-year bond was down by 0.47 percentage points to 6.43%, and Italy’s dropped by 0.25 percentage points to 5.83%.

The euro rallied hard on news of the deal.

That is good news for European leaders who hoped to restore confidence in their debt-ridden union.

European Council President Herman Van Rompuy hailed the summit as a “real breakthrough” and European Commission President Jose Manuel Barroso welcomed the “very ambitious decision that shows once again the commitment of the member states … to the irreversibility of the euro”.

“We took a good decision on growth,” said German Chancellor Angela Merkel, who described the summit as a success “on all fronts” but may face criticism at home over the deal to support struggling banks with the Eurozone’s bailout fund.

French President Francois Hollande was happy to have achieved his two key goals at the summit — the growth package and the financial transactions tax.

Results of the summit were especially satisfactory for Italy.

“In the end, our colleagues have admitted we have achieved something positive for the EU as a whole because the growth pact without mention of short term interventions would have seemed less impressive,” said Italian Prime Minister Mario Monti.

Greek President Karolos Papoulias also welcomed the deal.

“The agreement offers us the prospect of sovereign debt reduction in the future under circumstances,” he said, adding that growth-stimulus initiatives were also of major significance for recession-hit Greece to counter record high unemployment.

Danish Prime Minister Helle Thorning-Schmidt said: “We have taken an important step … It is really good for both Europe and Denmark. We will have some projects that can lead to growth and jobs.”

Results of the summit were also cheered by analysts.

“It is a very clear indication that now the EU must not only focus on cuts, but also on growth. Given how much we have talked about cuts and reforms throughout the spring, we will now get an injection of money into the European economy. It is a good signal to the markets and citizens,” Marlene Wind, director of the Center for European Politics at Copenhagen University, told Danish public broadcaster DR News.

“The summit is a success. It is obviously in the right direction, because it finally puts in place an effective tool to fend off crisis,” said Natixis bank bond strategist, Rene Defossez.

But some remained sceptical.

Tito Boeri, a distinguished economics professor at Milan Bocconi University, pointed out the permanent rescue mechanism at the centre of the agreement was not equipped with its own funds (member states represent 90% of the capital commitments), thus its action will be limited.

“It will not be able to act as a bank, and has not all the necessary resources,” he said.

The chief Eurozone economist of Italy’s largest bank Unicredit, Marco Valli, agreed that the meeting’s outcome had exceeded expectations, but “there was no mention of a future potential move towards joint and several liabilities.”

According to other experts, although the agreement has paved the way to a higher degree of cross-border integration and to greater flexibility of crisis-fighting mechanisms, the fact that weaker countries have to formalise their request for help would still expose them to speculation attacks.

Paolo Balice, president of the Italian Financial Analysts Society (AIAF), called on the EU leaders to be more “coherent” from now on.

“It is important that in the next weeks, there are no vacillations or statements in the opposite direction from the one taken, as already happened in the past,” he said.

In his view, the summit had the merit to set instruments to handle the emergency.

“Now we must continue in this direction, we are not allowed to step back anymore,” Balice said.