- Associated Press - Friday, June 29, 2012

BERLIN — 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.

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