The European leaders meeting in Brussels for a two-day summit have agreed to make use of Eurozone's bailout funds to recapitalize the region's banks directly once an effective single supervisory mechanism is established, relieving the governments of the burden of bailing out troubled lenders.
The European Commission will present proposals for a single supervisory mechanism soon. "We ask the Council to consider these Proposals as a matter of urgency by the end of 2012," the leaders said in a statement on Friday.
"We affirm that it is imperative to break the vicious circle between banks and sovereigns," the statement read.
The leaders also discussed ways to reduce the high borrowing costs faced by Spain and Italy. European Council President Herman Van Rompuy said the permanent bailout fund, the European Stability Mechanism, or ESM, will not gain a senior creditor status when it takes over the loans granted to Spain for its ailing banks from the European Financial Stability Facility, or EFSF.
The summit urged rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for the recapitalisation of its banking sector. The financial assistance will be provided by the EFSF and once the ESM becomes available, it will then be transferred to the permanent fund.
The decision to recapitalize banks directly through rescue funds emerged after strong words from leaders, particularly Italian Prime Minister Mario Monti along with Spanish PM Mariano Rajoy, who advocated more steps to reduce their countries' borrowing costs.
French President Francois Hollande threw his weight behind Spain and Italy, while German Chancellor Angela Merkel finally gave in to the pressure after her fierce resistance to direct bank aid at the start of the summit.
The leaders vowed to use the rescue funds "in a flexible and efficient manner" to ensure the financial stability of the euro area.
They welcomed the European Central Bank's decision to serve as an agent to the European Financial Stability Facility and later to the European Stability Mechanism, when it comes into force, in conducting market operations.
The EU vested on the Eurogroup the responsibility of implementing the decisions made at the summit by July 9, 2012.
Earlier during the summit, the leaders approved a 120 billion-euro package to promote growth in the debt-stricken Eurozone as well as across the broader 27-nation European Union.
The growth package includes a 10 billion euro capital boost for the European Investment Bank. It also redirects 60 billion euros of unused structural funds to help small enterprises and create youth employment in most needy countries.
The package also calls for launching EU project bonds worth 4.5 billion euros for infrastructure improvements focusing on energy, transport and broadband. The growth plan approved also includes tax-policy pledges and more focused use of EU funding.
Earlier this week, the EU unveiled a report containing proposals for securing the stability of the Union, which recommends enforcing tighter fiscal integration with budget controls across the Eurozone and establishing a European banking union.
The proposed measures enhance the existing power the European Union has over the fiscal policies of the member-states. Critics, however, have raised concerns the report does not contain any suggestion to address the current debt problems faced by eurozone members.
by RTT Staff Writer
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