BRUSSELS — By the end of a vital two-day summit here, European diplomacy had played out like soccer, with Spain and Italy — the two nations headed to the Euro 2012 finals — emerging victorious and the Germans returning home in shock.
After 14 hours of talks, Berlin unexpectedly agreed to concessions clearing the way for a deal that could help both Madrid and Rome in their desperate efforts to stave off economic collapse.
Although the euro crisis is in its third year, you may still be wondering how European governments got into this sticky situation in the first place. If news of bailouts leaves you confused, this primer is for you.
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The agreement, while conditional on the creation of a regulatory body, addressed the core of the questions facing Europe: Who will cover the tab for its 2½-year-old debt crisis, and how?
Under the terms of the deal, troubled euro-zone countries would have more options for aid, including using a pool of European rescue funds to directly recapitalize ailing banks. That, in turn, would spare governments the humiliation of having to ask for aid themselves to channel to domestic banks, sidestepping the kind of intrusive financial inspections imposed on Greece, Ireland and Portugal.
The change could ultimately halt a toxic cycle that, while holding countries accountable for their banks’ errors, also pushed indebted nations deeper into the red as they took on ever more rescue cash to bail out their financial institutions.
The agreement in Europe delighted global investors, who sent stocks soaring. In the United States, the Standard & Poor’s 500-stock index rose 2.5 percent Friday, the sharpest increase since December, and the Dow Jones industrial average was up 2.2 percent. The strong performance capped the stock market’s best June since 1999. In Europe, investors were even more exuberant, with the German DAX and the Stoxx index of major euro-zone companies both jumping more than 4 percent.
The plan is to kick in only after a regional supervisor, based at the European Central Bank, is set up to regulate banks in the 17-nation euro zone — itself a major step that leaders said they would sign off on by the end of the year.
In addition, leaders agreed that countries could obtain bailout funds to buy up their government bonds on open markets — and thus bring down dangerously high borrowing costs — with fewer conditions attached.
‘Unthinkable’ decisions
The compromise reached here Friday fueled new optimism about the region’s ability to finally break the diplomatic impasses that have made its debt crisis as much political as economic.
“We have taken decisions that were unthinkable just some months ago,” European Commission President Jose Manuel Barroso said.
The breakthrough also signaled a reshaping of Europe’s political landscape.
German Chancellor Angela Merkel, the frugal East German physicist, had laid down the rules for coping with the crisis through her alliance with Nicolas Sarkozy when he was France’s president. But with his successor, the socialist Francois Hollande, leaning more toward the Italian and Spanish leaders’ vision of crisis management, a new three-against-one dynamic took hold here.
Backed by the French, Spanish Prime Minister Mariano Rajoy, a conservative who is protective of Spanish pride, and Italian Prime Minister Mario Monti, a sober and respected former E.U. official, resorted to brinkmanship. Both leaders vowed to block a $150 billion growth plan, seen as a centerpiece of the forum, if they did not win major concessions. Against their united front, Merkel blinked.
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