Leaders of eurozone adopt 'radical' British rescue plan

EU leaders last night agreed a sweeping rescue plan for the European financial system, based on the moves to guarantee, refloat and partially nationalise banks adopted by Britain last week. Leaders of the 15 euroland countries – accompanied by Gordon Brown – cast aside the divisions of recent days and came up with what President Nicolas Sarkozy called a "co-ordinated and ambitious" response to the worst financial crisis for 80 years.

EU countries, including Germany, France, Italy and Austria, will this morning announce a cascade of linked measures to pump new blood into the European banking system following last night's agreement at the élysée Palace in Paris. Other decisions will be taken at a full summit of EU leaders in Brussels on Wednesday and Thursday.

Mr Brown said that last night's meeting was an "important moment for the world economy". Speaking in the beautiful gardens of the British ambassador's residence, a few yards from the élysée Palace, he said: "Decisions that we make in the next few days are decisions that will affect us for many years ahead."

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Although Mr Brown declined to take the credit directly for the strategy agreed in Paris, French and other European officials said it was largely inspired by the "radical" proposals adopted in London last Tuesday.

There will be no single EU-funded rescue package – something rejected as impractical – but there will be what the German Chancellor, Angela Merkel, described as a "toolbox" of measures which can be adopted at national level without shifting the financial pain from one EU country to another.

Mr Brown said the EU plan would be based broadly on the three points in the UK rescue strategy. First, measures could be taken by governments to "recapitalise" banks, using taxpayers' money in return for a state share in the company (partial nationalisation). Secondly, measures would be taken by central banks to pump more liquidity – cash – into the financial system.

Thirdly, and crucially, governments would "guarantee" loans between banks – the financial system's life's blood – for up to five years. States could also, if they wished, subscribe directly to new bank debt.

The collapse of inter-bank lending – which threatens to freeze all credit to business or individuals and to collapse the "real" economy – is regarded as the most chilling possible consequence of the financial crisis. Bad debts have become so vast and so complex that banks have been too scared to lend to one another. EU governments agreed last night that they would guarantee "for an interim period and on appropriate commercial terms" all new debt issued by banks for up to five years.

President Sarkozy, who chaired the meeting, said: "This is not a gift to banks but essential to help them function. Europe needed concrete measures and unity – and that is what we have achieved."

EU leaders and finance ministers have made two previous attempts to take – or seem to take – united action to respond to the crisis in the past nine days. Both those previous meetings were virtually ignored by the markets because they failed to quell the cacophony of differing statements and actions by European governments.

Fingers were being crossed in Paris last night that yesterday's meeting – together with planned action at global level, including a possible emergency G8 summit in the next few days – would be enough to prevent another collapse, or outright panic, on Asian markets overnight and on European stock exchanges this morning.

Not all governments will adopt all the measures in the package. The French, German, Italian and Austrian governments – and possibly several others – will make co-ordinated announcements this morning.

All EU countries are expected to introduce a system of guarantees, or inducements, for bank-to-bank loans on the model of the British rescue plan. The German Chancellor, Angela Merkel, who has been one of the main stumbling blocks to Europe-wide action, is also expected to announce a €400bn (£3.16bn) scheme to "recapitalise" (and in effect partially nationalise) struggling German banks.

"There are 27 countries in Europe. It is not so easy to get them all to agree," said President Sarkozy, when asked why it has taken EU governments so long to grasp the severity of the crisis. He suggested that the EU should, once the crisis is over, reconsider its disparate rules for management of financial markets "so we don't experience again what we have lived through in recent days".

Relations between Chancellor Merkel and President Sarkozy are said to have been deeply strained by the crisis, despite a show of friendliness at yesterday's meeting and at another encounter in France on Saturday. Relations between Mr Brown and President Sarkozy appeared excellent, however. The Journal du Dimanche – a newspaper which seems to reflect the mood of M. Sarkozy – paid tribute to Mr Brown yesterday as a "magician" who had "rediscovered" his magic touch.