LONDON — Leaders from the euro zone’s four largest nations – Germany, France, Italy and Spain – agreed Friday to back a plan to pump as much as $164 billion into the region’s moribund economy, with German Chancellor Angela Merkel signaling a new willingness to use fiscal stimulus as a tool to fight Europe’s deepening financial crisis.
Merkel, nicknamed “Frau Nein” or “Mrs. No” for her resistance to deploying aggressive action in Europe’s 2½-year-old debt crisis, has thus far maintained that deep budget cuts are the best cure for what ails Europe. But her bow Friday toward limited injections of cash aimed at spurring growth and creating jobs indicated a victory for President Francois Hollande, France’s new Socialist leader who has sought to make stimulus a new part of the region’s crisis management plan.
But if Merkel seemed to give in on stimulus, she held firm on the larger question of how and when to roll out bigger fixes to the euro currency union that, in the coming months and years, could begin to transform the euro zone from a loosely integrated group of 17 nations into a centralized bloc more similar to U.S. states. At the same time, Merkel seemed to reject the short-term fixes to the crisis being floated by troubled Spain and Italy, whose economies are weathering severe stress as panicked investors dump their government bonds.
“We came together on a shared vision of the economic and monetary union,” Hollande said after the meeting of the four leaders in Rome.
The “mini-summit” was aimed at laying the groundwork for a broader European Union summit in Brussels next week. But while the outcome Friday suggested that the region’s top leaders were managing to compromise on some issues, they were clearly still divided on others, with analysts warning that the plan set to emerge from next week’s summit might fall short of already diminishing market expectations.
In an indication of the seriousness of Europe’s woes, the European Central Bank on Friday said it would broaden the type of securities it accepts as collateral from euro-zone banks in exchange for loans — a move that could help funnel more cash to ailing banks in Spain.
The move came as the fallout from Europe’s crisis was spreading beyond the euro zone, with the Moody’s rating agency downgrading 15 global banks including Bank of America and Citigroup, as well as four of Britain’s largest financial institutions, citing worries about their exposure to volatile world markets.
The four leaders came together Friday only six months after European Union governments forged what they claimed was a major step forward in combating the crisis, agreeing to a German-backed austerity treaty that automatically punishes member states that borrow too much and overspend.
There is now widespread recognition that the austerity treaty was too narrow to address the broader problems plaguing Europe. Next week, leaders will take yet another stab at it, but analysts caution that a solution may not come together with the speed global markets are demanding, potentially leading to a full-scale investor panic in Spain and Italy.
The Rome talks found a trio of leaders —Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy — trying to persuade the reluctant Merkel to take a more aggressive stance in fighting the crisis. Their mini-summit illustrated the changing political dynamic in Europe after the ouster by French voters of President Nicolas Sarkozy, who enjoyed a close relationship with Merkel through which the two leaders largely called the shots for the rest of the euro zone.
But Hollande has instead sought to include his Italian and Spanish counterparts in critical decision making, with the trio increasingly stacking up their collective clout against Merkel. That tactic seemed to work in getting the German leader to agree to a stimulus package that would equal roughly 1 percent of the euro zone’s collective economy.
“We have to talk about the subject of growth and creating employment,” Merkel said during a joint press conference in Rome. “That,” she added, “is the right signal that is needed now.”
But Merkel may not have been agreeing to much. A large portion of the stimulus would come from existing but unspent European Union structural funds, as well as cash from the European Investment Bank and special “project bonds” that would finance infrastructure projects. Proceeds from a new tax on financial transactions could also be tapped.
Analysts warned that unless the money was spent almost exclusively in hard-hit nations such as Greece, the amount being considered could simply be too small to have a major impact.
“If you dropped all of that into Greece in one go, you have a real game-changer, but that’s not going to happen,” said James Ashley, senior European economist at RBC Capital Markets in London. “The time it will take to identify the projects will be relatively protracted, and let’s be clear, it's not going to all go into Greece, it will be spread around the euro area.”
Merkel ruled out a call by Spain to use European rescue funds to aid Spanish banks, while pointedly abstaining from endorsing an Italian plan that would see those funds channeled into buying up troubled government debt.
France, meanwhile, seemed to accept Germany’s point that long-term fixes to the euro were a two-way street — with the promise of more German backing for its neighbors requiring them to cede more sovereignty over their banks and fiscal policy to the E.U.’s central authority in Brussels. The French have been particularly reluctant to cede such power, but Hollande said Friday that “relinquishment of sovereignty will be decided on the basis of the solidarity we decide on.”
Hollande, who initially called for a quick rollout of eurobonds, or collective debt backed by all nations in the euro zone, has retreated from that position in recent weeks in the face of German opposition. On Friday, he said he now viewed eurobonds — something analysts have said is desperately needed to shore up confidence in Europe — as only a “medium term” proposal.
Correspondent Edward Cody in Paris and special correspondent Karla Adam in London contributed to this report.