BRUSSELS — Europe’s leaders finally rose to the challenge Friday, backing bold ideas to help weak countries and frail banks ravaged by a debt crisis that has crippled economic growth and threatened the global financial system.
Markets roared their approval.
For the first time in 19 summits since the start of the crisis, the EU leaders defied low expectations by announcing plans to:
• Bail out banks, without putting any financial burden on strapped governments
• Ease borrowing costs on Italy and Spain, the euro region’s third- and fourth-largest economies
• Seek stronger, centralized regulation to European banks
• Rescue floundering countries, without forcing them to make painful budget cuts if they’ve already made economic reforms
•Tie their budgets, currency, and governments more tightly
Europe’s leaders trumpeted the agreement. The prime minister of Ireland — one of the five euro countries that has required emergency funds — said the plans marked a ‘‘seismic shift in European policy.’’ Prime Minister David Cameron of Britain said that ‘‘for the first time in some time we have actually seen steps . . . to get ahead of the game.’’
There was a sign immediately that Europe’s latest plan was easing fear in financial markets: The cost for the troubled government of Spain to borrow money on the bond market fell dramatically. The interest rate, or yield, on the country’s 10-year bonds fell by more than half a percentage point, to 6.34 percent.
The Dow Jones industrial average recorded one of its biggest gains of the year, and stocks advanced even further in Europe — in strong and weak countries alike. The benchmark stock index in Germany rose 4.3 percent, by far its best performance this year. Germany has the biggest economy in Europe, and a warm reaction there was a crucial sign of approval for the plan. Prices for oil and other commodities shot higher.
The decisions made at the European Union summit in Brussels won’t end the crisis that has gripped Europe for nearly three years. Plenty of questions remain about how the bank bailouts would work, whether there’s enough money committed to rescue banks and governments and whether impoverished, indebted Greece will be forced out of the euro club.
But for EU leaders who have consistently underwhelmed their exasperated publics and nervous financial markets, Friday’s plans marked a breakthrough.
At first it looked like the summit would produce little more than a modest plan to stimulate growth in Europe. But Italy and Spain, whose borrowing costs have soared to dangerous levels, refused to sign off on a $150 billion spending plan unless something was done to ease their financial burdens.
So the leaders signaled a willingness to expand the use of Europe’s two rescue funds. The money could be used to buy bonds to drive down a country’s borrowing costs. Or it could be loaned directly to troubled banks, which EU leaders said would help break ‘‘the vicious cycle’’ in which weak banks and weak governments threaten to drag each other down.
Before the summit, European leaders insisted that bailout funds be used only to rescue governments — like Ireland, Portugal, and Greece. If money was going to be used for banks, it had to first go to a government, which then funneled it to the troubled banks. But that added to the debt on a government’s books because it was responsible for repaying the money.
So efforts to help the banks ended up raising fears about governments. That is why Spain’s borrowing costs rose dramatically after the eurozone countries agreed to lend it $125 billion to rescue its banks.
The EU plans also call for a single regulator — probably the European Central Bank — to oversee Europe’s banks.