Hollande Wrests Merkel Concessions in Euro Crisis Plan

French President Francois Hollande led a revolt against Germany’s austerity-first doctrine for combating the financial crisis, winning easier aid terms for Spain and Italy in an effort to reshape the balance of power in the euro region.

At the 19th European summit since the crisis broke out, Hollande pushed through the concessions by threatening to delay endorsement of a deficit-reduction treaty that German Chancellor Angela Merkel touted as one of her signature achievements.

“The best way to make others move is to move ahead oneself,” Hollande told reporters as the summit concluded in Brussels today.

Euro-area leaders left open the timing and conditions of any support for the Spanish and Italian bond markets, raising the risk that bickering over the fine print will -- as after prior summits -- nullify the initial boost to confidence.

Euro region bailout funds will be used “in a flexible and efficient manner,” a statement said after the nocturnal bargaining that ended today at 4:30 a.m. For now, the markets like what they see, pushing down Spanish and Italian yields and sending the euro to its biggest rally all year.

By provoking the open breach with Merkel, the new French leader fractured the Berlin-Paris coordination that marked the crisis management after Greece became the first victim in late 2009. It consigned to the past the “Merkozy” epithet that stood for Merkel’s collaboration with the previous French president, Nicolas Sarkozy.

Plans Awry

Merkel’s plans for the summit to focus on growth-boosting steps and a decade-long roadmap for strengthening the currency union went awry when Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy demanded immediate relief for their stressed bond markets instead.

The German leader was cornered when Hollande, in office for six weeks, expressed reservations about the deficit-control treaty, only hours before Merkel was due to jet back to Berlin and oversee its ratification in the German parliament.

The outcome was to lower the bar for the bloc’s bailout funds to intervene on the bond markets. Countries that comply with existing economic-policy recommendations will be eligible, and additional conditions won’t be set, the leaders agreed.

Still, Merkel said working with the new French leader was “fun.”

With international pressure mounting for Europe to tackle the crisis, the leaders remained coy about how the more flexible powers will be used, when, and by whom. Europe will “pull out the right card at the given time,” Luxembourg Prime Minister Jean-Claude Juncker told reporters.

German Control

As Europe’s dominant economy, Germany can control the use of the aid funds: the temporary European Financial Stability Facility, set up in 2010, and the European Stability Mechanism, a permanent fund to be phased in starting next month.

While 500 billion euros in fresh money is available, the euro zone has already pledged as much as 100 billion euros ($126 billion) to recapitalize Spain’s banks and another 10 billion euros for Cyprus. Those programs would bring to five the number of countries tapping European assistance.

Spain won two concessions. Creditor countries dropped a demand that bailout loans for Spain would be first in line to be paid back in the event of a Spanish default. The insistence on “preferred creditor status” would have put regular Spanish bondholders at a disadvantage.

Spain’s Gains

Euro leaders also agreed to let the permanent bailout fund pour money into Spanish banks directly, instead of channeling it via the Spanish government. Direct recapitalizations will be possible once Europe sets up a single banking supervisor, possibly as early as 2013.

Merkel pushed back against the notion that aid will be easier to come by. Germany’s parliament, for example, will have two opportunities to veto any request for direct capital injections to banks by the rescue fund, she said.

“There is pressure on the financial markets, that cannot be denied,” Merkel told reporters. “Some countries are in a very complicated situation. There was an interest here to find solutions. My task was to see to it that the solutions respect the procedures and rules that we have.”

Watching from the sidelines is the European Central Bank, which bought 219.5 billion euros of ailing countries’ bonds until suspending the purchases in February under pressure from German representatives on its policy council.

Draghi’s Pleased

ECB President Mario Draghi welcomed the immediate anti- crisis steps and the leaders’ commitment to map out by the end of the year a timetable toward a more resilient economic union, including centralized bank oversight, better controls on national budgets and possible moves to joint borrowing -- an innovation opposed by Germany.

“I am actually quite pleased with the outcome,” Draghi said. “It showed the long-term commitment to the euro by all member states of the euro area. Also it reached tangible results in the shorter term.”

Draghi was silent on possible ECB anti-crisis steps. The next meeting of its policy-setting council is on July 5.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Helene Fouquet in Brussels at hfouquet1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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