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Germany forfeits to Spain and Italy, agreeing to loan directly to banks

After weeks of refusing to yield, German Chancellor Angela Merkel agreed to allow eurozone bailout funds to be used to recapitalize struggling banks. 

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German Chancellor Angela Merkel addresses lawmakers on the decisions of the EU summit at the parliament Bundestag in Berlin, on June 29.

Markus Schreiber/AP

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Germany ceded a victory to its southern neighbors Spain and Italy today – not in a football stadium, but in a make-or-break summit in Brussels as European leaders reached a landmark deal to stave off what many feared would be the beginning of the end of the common currency.

After days of closed-door and microphone diplomacy, German Chancellor Angela Merkel finally agreed to allow the 17-member eurozone’s bailout funds to be used to lend money directly to ailing banks, something she had ruled out only a day before.

Berlin's concession was made in exchange for more European Union oversight of banks and national budgets – a bank union, essentially. The agreement illustrates just how worried Europe – even Germany – is of a eurozone collapse. 

It will allow countries like Spain to recapitalize their ailing financial sectors without computing the loans as a government burden, something that will act as a shortstop against climbing sovereign interest rates. It will also strengthen Europe’s good banks, especially in countries like Germany and the Netherlands, which have been dragged down by broader eurozone concerns.

The new guidelines give the European Central Bank more ammunition to intervene in financial markets, much like the US Federal Reserve does, which in turn gives more time for economic reforms to kick national economies back into gear, especially in too-big-to-fail Spain and Italy.

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