Euro stability

News of the proposed eurozone stability package saw markets rise worldwide on Monday, which was just the sort of reaction that European Union finance ministers and the International Monetary Fund had hoped for.

Frankfurt's DAX closed the day up 5.3 percent, London's FTSE 100 index ended the day up 5.16 percent, while in Paris, the CAC-40 soared to close up by 9.66 percent. In New York, the Dow Jones jumped by more than four percent in early trading.

The euro shot up by 1.5 cents against the US dollar after the announcement of the deal, then fell slightly to 1.28 dollars as the markets waited to see if member nations would follow through with austerity measures. This followed a 14-month low against the dollar last week, amid uncertainty that the bloc would rescue Greece, Spain and Portugal from possible default.

The markets were reacting to an announcement made by European Union finance ministers and the International Monetary Fund in Brussels early on Monday, that they had agreed on the creation of permanent measures worth 750 billion euros ($964 billion) to bail out eurozone states that run into financial difficulty.

Under the plan, the European Commission is to provide 60 billion euros, while members of the 16-nation eurozone have pledged 440 billion euros to the fund. The IMF is to contribute an additional 250 billion euros, said Spanish Finance Minister Elena Salgado.

German Chancellor Angela Merkel said that the nearly trillion-dollar package would serve to "strengthen and protect" the euro. She said that the eurozone must actively resolve its stability problem "at the roots" by pressing member states to balance their budgets. "Budget consolidation in all member states is extraordinarily important," said Merkel.

The chancellor also welcomed new austerity measures promised by the Spanish government, saying they send an important message to the markets.

Washington has praised Europe's stabilization plans. One White House official said President Barack Obama supports "assertive action" to address the Greek debt crisis, and that European leaders have his support.

Calming the markets

The European commissioner for economic and monetary affairs, Olli Rehn, said the massive bailout "proves that we will defend the euro, whatever it takes."

The European Central Bank will also implement exceptional measures in support of the package, the EU's top economic official said on Monday.

International Monetary Fund chief Dominique Strauss-Kahn hailed the package as a big step forward, and said the IMF would be happy to contribute should eurozone countries require additional help from beyond the European Central Bank.

Calming the fears of international markets appears to be the main goal of the package, but Swedish Finance Minister Anders Borg described the situation more bluntly.

"We now see herd behavior in the markets that is really pack behavior, wolf pack behavior," Borg told reporters. "If we will not stop these packs, they will tear the weaker countries apart."

Meanwhile, Britain's chancellor of the exchequer, Alistair Darling, said the package was a "good deal" for Europe, and that it was in the best interests of Britain's banks and export market.

However, Darling did make it clear that this was a problem for the eurogroup.

"What we can't do is provide support for the euro," said Darling. "That's got to be for those countries that use the euro that are members of the eurogroup."

Awkward timing

The euro stabilization deal comes just as state elections in Germany, the eurozone's largest economy, have taken away Merkel's majority in the upper house of parliament.

The results of the election in North Rhine-Westphalia were seen by some as a reaction to Merkel's reluctant support of the EU's Greek bailout, which is unpopular with many voters in Germany.

Nevertheless, Merkel stressed the measures were needed to protect the euro and German incomes.

"It is the first time in the history of the euro and the EU, and we are protecting our currency in an extraordinary situation," said Merkel. "I can also put it this way to the population: we are protecting the money of the people in Germany."

The European Commission is planning to meet on Wednesday to determine how to strengthen EU budget rules and economic surveillance in the eurozone to avoid a future crisis.

mk/gb/APF/dpa/Reuters
Editor: Chuck Penfold