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Breakthrough in Brussels

New deal forged to fight euro crisis

By: David McHugh and Paul Wiseman

Posted: 07/1/2012 4:15 AM | Comments: 0

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Michel Euler / The Associated Press European Central Bank President Mario Draghi speaks with journalists. (CP)

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Rodica Melvin / The Associated Press European Central Bank President Mario Draghi, center, speaks with journalists at an EU Summit in Brussels on Friday. (CP)

BRUSSELS, Belgium -- Europe's leaders finally rose to the challenge Friday, backing bold ideas to help weak countries and frail banks ravaged by a debt crisis that has crippled economic growth and threatened the global financial system.

And markets roared their approval.

For the first time in 19 summits since the start of the crisis, the EU leaders defied low expectations by announcing plans to:

-- Bail out banks, without putting any financial burden on strapped governments.

-- Ease borrowing costs on Italy and Spain, the euro region's third- and fourth-largest economies.

-- Seek centralized regulation to European banks.

-- Rescue floundering countries, without forcing them to make painful budget cuts if they've already made economic reforms.

-- Tie their budgets, currency and governments more tightly.

There was a sign immediately that Europe's latest plan was easing fear in financial markets: The cost for the troubled government of Spain to borrow money on the bond market fell dramatically. The interest rate, or yield, on the country's 10-year bonds fell by more than half a percentage point, to 6.34 per cent.

The Dow Jones industrial average recorded one of its biggest gains of the year and stocks advanced even further in Europe -- in strong and weak countries alike. The benchmark stock index in Germany rose 4.3 per cent, by far its best performance this year. Germany has the biggest economy in Europe and a warm reaction there was a crucial sign of approval for the plan. Prices for oil and other commodities shot higher.

The decisions made at the European Union summit in Brussels won't end the crisis that has gripped Europe for nearly three years. Plenty of questions remain about how the bank bailouts would work, whether there's enough money committed to rescue banks and governments and whether impoverished, indebted Greece will be forced out of the euro club.

But for EU leaders who have consistently underwhelmed their exasperated publics and nervous financial markets, Friday's plans marked a breakthrough.

The EU plans call for a single regulator -- probably the European Central Bank -- to oversee Europe's banks. Currently, banks are regulated by their national governments such as Spain's, which have been slow to recognize loan problems and shut down the worst banks.

Most analysts cheered the EU plans but worried about the questions left unanswered. Europe's two bailout funds have a combined $625 billion in lending power; up to $125 billion of that is already committed to helping Spain bail out its banks. The remaining $500 billion looks small compared to $3.1 trillion in Spanish and Italian bonds outstanding.

The solution hovering in the background, say some economists, is the European Central Bank. The ECB could buy any necessary amount of government bonds, backed if need be by the bank's theoretically limitless power to create new money.

-- The Associated Press

Republished from the Winnipeg Free Press print edition July 1, 2012 B11

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