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Europe summit surprises with bold moves

After 18 disappointing summits since the start of the debt crisis, Europe's leaders appear to have finally come up with quick fixes and long-term plans that show they are serious about restoring confidence in their currency union.

Global markets sighed with relief, debt-saddled Italy and Spain appeared victorious and Germany's Angela Merkel faced potential criticism at home for conceding to pressure for an immediate deal.

Leaders of 17 countries that use the euro agreed to:

-Allow two European bailout funds to pump money directly into troubled European banks, rather than make loans to governments to bail out the banks. The move rescues banks without putting strapped countries deeper in debt.

-Use bailout money "in a flexible and efficient manner to stabilise" European government bond markets.

-Let countries that have made economic reforms as require by EU authorities tap the European rescue funds without submitting to stringent bailout programs.

-Tie their budgets, currency and governments ever tighter in a vast new economic union down the line.

European Council President Herman Van Rompuy called it a "breakthrough". Global stock markets and the euro rallied hard.

Concerns remain. Most of the measures approved in the Brussels summit will take months to come into force. The 500-billion-euro ($A623.3 billion) firepower of the permanent bailout fund may not be enough. And new roadblocks could send the continent back into crisis.

But some key points will kick in within 10 days: on July 9, eurozone countries will agree to give Spanish banks rescue loans and also allow the temporary European bailout fund to directly purchase Spanish government bonds.

The decision is a victory for Spain and Italy, whose borrowing costs have risen to near unsustainable levels.

In Germany, Chancellor Angela Merkel is likely to face a grilling from a sceptical parliament. Heading into the summit, Merkel had insisted any financial help from Europe's bailout fund must come with tough conditions, so a separate decision allowing countries that have reformed their economies easier access to bailouts, without such stringent conditions, was widely seen as a defeat by the German press.

In addition, leaders of eurozone countries authorised the EU bailout funds to buy bonds of countries to reduce the interest rates the markets charge.

Leaders of the full 27-member European Union, which includes non-euro countries such as Britain and Poland, also agreed to a long-term framework toward tighter budgetary and political union, though those plans will require treaty changes and won't be realised for years.

The scale of the moves were unexpected and provided investors a reason for optimism, even as analysts cast doubt on the plans' feasibility and noted that some fundamental problems with the common currency remain.

Stocks around the world surged on Friday, with markets in countries on the front line of the crisis doing particularly well. Italy's FTSE MIB and Spain's IBEX indexes each rose three per cent.

Perhaps more importantly, the yield on Spain's 10-year bond dropped by 0.32 percentage points to 6.58 per cent. Italy's was down by 0.14 percentage points to 5.94 per cent - away from the seven per cent level which is seen as unsustainable over the long term.