A breakthrough deal to rescue the euro was marred yesterday by bitter recriminations between Italy and Germany over who emerged the winner at a crunch summit of EU leaders in Brussels.
Angela Merkel, the German Chancellor, gave more ground than expected after Italy and Spain held a marathon summit to ransom. Backed by France's new Socialist President François Hollande, they refused to sign a €120bn "growth pact" until Germany backed short-term measures to aid the banks. Spain, desperate to reduce its crippling borrowing costs, will be the first beneficiary. Ireland and Italy could also be helped.
Following 13 hours of what insiders described as "horrid" negotiations, a deal was finally agreed in the early hours yesterday. After a single banking supervisor is set up, eurozone bailout funds will be able to recapitalise ailing banks directly, rather than handing the money to member states. The aim is to break the "vicious circle" of piling even more debt on to governments.
Mario Monti, the Italian Prime Minister, claimed a double victory over Germany hours after his country's football team had beaten the Germans in their Euro 2012 semi-final. While insisting his relations with Ms Merkel remained "excellent," Mr Monti said: "Italy worked a lot and put a lot of pressure at the negotiating table for this result to be achieved. This is a contribution of ideas that Italy put on the table which in the end of supported by everybody."
The Germans were said to be "irritated" at Italy's "spin". One diplomat said: "This is Monti fighting for his own survival. Angela Merkel has not capitulated. She can still turn off the cash tap. She has not given up the right to impose strict conditions on countries using the bailout funds."
Ms Merkel insisted the deal did not violate her principle of no aid without conditionality or the guidelines set by the German Parliament. "There was pressure here to find a solution and I saw my role as ensuring that these solutions should respect the procedures that we already know and have," she said. But the German Chancellor faced strong domestic criticism for her apparent climbdown as Opposition MPs demanded an immediate explanation."The Government has to account for its 180-degree turn," insisted Carsten Schneider, the Social Democrats' budgetary expert. "The summit was a crashing defeat for Angela Merkel."
Klaus-Peter Willisch, an MP from Ms Merkel's conservative Christian Democratic Party, warned that the concessions which were agreed meant "Germany being liable for everyone."
Despite the concessions, the German Parliament was expected last night to approve the eurozone's permanent bailout fund, the European Stability Mechanism. But Ms Merkel also has to get the measure approved by Germany's powerful Constitutional Court.
Financial markets reacted positively to the Brussels agreement yesterday but some analysts described it as more "sticking plaster".
Italian and Spanish borrowing costs fell as investors seemed to take comfort from the bond buying deal. Spanish 10 year yields fell to 6.35 and Italian 10 year yields eased to 5.85 per cent. Irish 10 year bond yields also fell. Spain's Ibex stock market jumped by 5.6 per cent and Italy's main equities market finished up 6.6 per cent.
But City analysts warned that the bond buying plan, once in operation, might merely encourage investors to sell their holdings of sovereign debt because there will only be €500bn of resources in the two bailout pots.
The decision in Brussels that the financial assistance from the bailout funds used to recapitalise Spain's banks will not gain senior status was welcome news to the lenders' bond holders, who feared being pushed down the queue of creditors.
David Cameron secured an important victory by ensuring that the banking supervisor will cover the eurozone rather than all 27 EU states. It will be based on the European Central Bank and so will not have the power to overrule the Bank of England.
The Prime Minister, who hammered out a deal with the European Commission, claimed he had also won a safeguard that the banking union would not undermine the EU's single market, saying it will apply only to the 17 eurozone nations. B
But EU sources said the "17 or 27 question" was still "up for grabs" and a series of legal wrangles could lie ahead. Mr Cameron admitted Britain would need "permanent vigilance" to defend its interests.
Summits past: Power plays
7 May 2010 Eurozone countries agreed a 110 billion euro bailout to prevent the collapse of the Greek economy. Talks continued into the early hours in Brussels before a bailout agreement was reached "conditional on the implementation of austerity measures".
27 October 2011 More "marathon" Brussels discussions over a 1 trillion e uro bailout for the most at risk Eurozone countries. European Union leaders reach a three-pronged agreement described as "vital" to solve the regions debt crisis. Larger European economies supposedly protected from the debt crisis by the deal.
9 December 2011 Prime Minister David Cameron vetoes EU-wide strategy to tackle the Eurozone crisis following more than 10 hours of late-night negotiations. A new accord strengthens ties between remaining EU states to tackle the financial crisis.
29th June 2012 After 13 hours of talks it was announced that EU leaders had agreed on a measure to use the Eurozone's planned bailout fund to support struggling banks. President of the EU council, Herman Van Rompuy, claims it will break the 'vicious circle' between banks and national governments.Reuse content