German Chancellor Angela Merkel speaks during a media conference at an EU Summit in Brussels on Friday, June 29, 2012. European leaders have agreed to use the continent's permanent bailout fund to recapitalize struggling banks, and agreed to the idea of a tighter union in the long term. (AP Photo/Michel Euler)
German Chancellor Angela Merkel speaks during a media conference at an EU Summit in Brussels on Friday, June 29, 2012. European leaders have agreed to use the continent's permanent bailout fund to recapitalize struggling banks, and agreed to the idea of a tighter union in the long term. (AP Photo/Michel Euler)
German Chancellor Angela Merkel, center, speaks with European Central Bank President Mario Draghi, left, and Italian Prime Minister Mario Monti during a round table meeting at an EU Summit in Brussels on Friday, June 29, 2012. European leaders have agreed to use the continent's permanent bailout fund to recapitalize struggling banks, and agreed to the idea of a tighter union in the long term. (AP Photo/Michel Euler)
French President Francois Hollande arrives for a press conference at an EU Summit in Brussels, Friday, June 29, 2012. (AP Photo/Michel Euler)
BERLIN (AP) ? German Chancellor Angela Merkel defended concessions made to struggling Spain and Italy at a European Union summit on Friday as she prepared to address lawmakers at home, where media headlines loudly proclaimed her political defeat.
Merkel had been opposed to some of the measures that she and the other 16 leaders of the euro countries agreed on Friday. They include allowing Europe's bailout fund to give money directly to a country's banks, without imposing strict austerity conditions on the government.
She insisted her tough-love approach was intact, but German papers on Friday were damning, reading "Merkel buckles" and "Merkel's defeat."
Heading in to the Thursday-Friday summit in Brussels, Merkel had appeared in a thoroughly uncompromising mood ?insisting on the importance of getting budgets in order and improving eurozone strugglers' competitiveness while brushing aside talk of shared debt liability in Europe.
But in a victory for Spain and Italy, she agreed that funds set up to bail out indebted governments will be allowed to funnel money directly to stressed banks ? once an "effective single supervisory mechanism" for banks is set up.
Merkel said that was a "medium-term" prospect, while EU President Herman Van Rompuy stressed that all involved will work speedily to have a draft of the necessary legal and institutional framework for a centralized banking authority by year's end.
Leaders also agreed that countries that pledge to implement reforms and budget policies demanded by the EU's executive Commission could tap rescue funds without having to go through the tough austerity measures that Greece, Ireland and Portugal were forced to accept in return for their bailout cash. That could make seeking outside help more politically palatable to governments such as Italy's, but also leaves Merkel open to accusations of watering down her insistence that aid must come with strings attached.
Merkel made a "180-degree turn," tweeted Carsten Schneider, a prominent lawmaker with Germany's opposition Social Democrats, demanding an explanation.
"Italy pushed through cash without conditions ? that will set the tone for all," he wrote.
But Merkel insisted in Brussels that "we remain completely within our approach so far: help, trade-off, conditionality and control, and so I think we have done something important, but we have remained true to our philosophy of no help without a trade-off."
And she was at pains to stress that there still wouldn't be money with no strings attached, insisting that countries would still be obliged to comply in a given time frame with recommendations for their economies set out by the European Commission.
"The discussion has been going a bit as though there were no conditionality any more ... that's not the case," she told reporters before leaving Brussels.
Markets cheered the agreement, with the DAX up 3.6 percent in afternoon trading in Frankfurt, Spain's Ibex up 4.7 percent and Italy's FTSE-MIB up a stunning 5.3 percent. The euro up 2 percent at $1.2680.
Crucially, borrowing rates for Spain and Italy dropped sharply. The benchmark rate on Spain's 10-year bond dropped 0.45 percentage points to 6.45 percent. Italy's fell 0.22 percentage points to 5.87 percent.
Merkel was to address Parliament in Berlin later Friday ahead of previously planned votes on approving her cherished European budget-discipline fund, the so-called fiscal compact, and the eurozone's future ?500 billion ($623 billion) permanent rescue fund, the European Stability Mechanism. Parliament won't be voting on the decisions made at the summit.
Merkel faced skepticism at home, where her hard-nosed approach to crisis management has been popular.
Under the headline "Merkel buckles," the Bild newspaper argued that the summit decisions "mark a turning point in crisis policy" and said that "Merkel gave up her hard position." The top-selling daily paper has been a cheerleader for a tough approach.
Leading news website Spiegel Online headlined its story on the summit: "The night in which Merkel lost," while Die Welt newspaper wrote of "Merkel's defeat in a historic night."
In the Netherlands ? which has backed Merkel's tough line and holds elections in September ? caretaker Prime Minister Mark Rutte was blasted by euroskeptic Geert Wilders, who brought down Rutte's minority coalition earlier this year when he refused to support an austerity package designed to cut the Dutch budget deficit.
"Rutte slavishly on his knees for the Italian and Spanish mafia: Billions of euros of direct support from the ESM for their banks possibly after all," Wilders tweeted.
Still, Carsten Brzeski, an economist at ING in Brussels, questioned whether Italy had in fact followed up its victory over Germany in football's European Championship on Thursday night with a victory at the summit. He noted that moves such as recapitalizing banks directly are still subject to some conditions and there was no immediate decision to help out Italy.
"The only real concrete decision taken ... is the start of a single bank supervision," he said. "In the end, the German principle of conditional integration is still intact."
"Short-term relief for Spain and Italy, however, remains very cryptic and limited," Brzeski said.
Analysts also noted that the amount of money available in the rescue fund, or ESM, is dwarfed by the amount of debt across the continent. Italy alone has outstanding debt of ?2.4 trillion.
European leaders also agreed at the summit that bonds purchased by the rescue fund for Spain's bailout will no longer enjoy preferential treatment to other bondholders in case of a default.
Previously, they looked set to enjoy "senior" status, which had the unintended consequence of scaring private investors away. Merkel insisted that was a one-time move that won't affect future moves by the ESM.
And she made clear that her opposition to moving soon to jointly issued eurobonds remains unchanged. Experts say eurobonds would help weaker countries like Spain by spreading their debt risk across multiple countries.
But Germany worries about being exposed to that new debt and says eurobonds would remove pressure on weaker countries to reform their economies by cutting red tape, fighting tax evasion and lower business costs.
Leaders delayed their discussion of such long-term issues until October.
Van Rompuy and other senior EU officials had laid out a vision for the future make-up of the eurozone in a sweeping document presented before the summit. It includes share debt and giving up national powers over budgets to a central authority.
Merkel has been a leading advocate of much deeper European integration as a response to the crisis ? though she has insisted that debt-sharing can come only at the end of that process.
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Don Melvin, Angela Charlton and Paul Wiseman in Brussels contributed to this report.
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