Europe Unified On Proposal to Protect Banks

German Chancellor Angela Merkel, Italian Prime Minister Silvio Berlusconi and others among the 15 government leaders made similar plans for their own rescue measures, with Sunday's accord providing only a framework or list of suggestions.

The degree of coordination among European governments has been closely followed since the financial crisis exploded in Europe three weeks ago. The ideology of European unity has been planted firmly across the continent, leading many in the public to expect joint action in times of crisis. In addition, many of the troubled banks work across borders, making cooperation a necessity.

Economists have suggested that the most urgent need is to get credit flowing again, the main goal of the promise of guarantees for new credit issues. Banks have become afraid to lend to other banks, they said, as well as to businesses and consumers. The credit freeze has started to slow down the real economy and has raised the specter of increased unemployment and flat growth rates across Europe, officials warned.

Merkel told reporters that the main goal of Sunday's agreement was to jolt Europe's financial markets back into action, supplying confidence that banks would not be allowed to fail and that adequate funds would be made available to renew more normal lending patterns.

"It will allow markets to start functioning again," she said. "That was our aim. It is a strong message to the market."

But a similar message issued by the leaders of France, Germany, Italy and Britain on Oct. 4 failed to do the job. It was followed by a week of panic declines in stock markets across the continent, pushing leaders into the more aggressive measures suggested in Sunday's communique.

"I want to say to our fellow citizens, in all the European countries, that they can -- that they must -- have confidence," Sarkozy declared.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, lauded the European agreement in comments ahead of the fund's annual meeting with the World Bank on Sunday in Washington.

"Coordinated action is now taking place," he said, adding that a unified European position is "what was missing" in a unified global response to the crisis. But he added that although he was "confident" investors would respond well when markets opened in Asia, there was no way to be sure. [In trading early Monday, Hong Kong's Hang Seng index and South Korea's Kospi index were up. Japan's Nikkei index was closed for a holiday.]

Although the crisis has been most concentrated in the United States, Europe and Japan, Strauss-Kahn and World Bank President Robert B. Zoellick cautioned that its impact on developing and poor countries could worsen. "The number of countries asking for support in the last two weeks is incredibly increasing," Strauss-Kahn said.

In the past, the IMF has offered financial lifelines to developing countries in crisis, though it has also lent to industrialized nations. In the 1970s, Britain and Italy received IMF financing; in the 1980s, so did Portugal, Australia and Iceland. An IMF team has been dispatched to Iceland, where the banking system and currency are in meltdown. Analysts said hard-hit countries in Eastern Europe might be next.

The World Bank additionally announced plans to explore the creation of a fund that could recapitalize banks in developing countries that lack the fiscal ability to defend against the financial crisis.

Staff writer Neil Irwin in Washington contributed to this report.