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June 27, 2017

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Markets rise as EU leaders clinch deal

Cautious Optimism

The leaders also postponed a decision on the future heads of the Eurogroup of eurozone finance ministers and the ESM rescue fund and an ECB executive board position because Merkel left early to attend the parliament debate in Berlin.

That avoided another setback for Germany, since veteran Eurogroup Chairman Jean-Claude Juncker of Luxembourg was set to be reappointed for a limited period because other countries including France did not want German Finance Minister Wolfgang Schaeuble to get the job, to avoid the impression that Berlin is calling all the shots in the eurozone.

Exceeding Expectations

Market economists applauded both the short-term measures to steady markets and the longer-term direction, saying that for once, after 20 summits since the crisis began in early 2010, eurozone leaders had exceeded admittedly low expectations.

"I think the ECB being made the banking supervisor is actually the biggest long-term step because it points the way to banking union," said Megan Greene, analyst at Roubini Global Economics, which is often deeply pessimistic about the eurozone's future.

"The EU summit surpassed expectations by taking a significant step towards banking union," Commerzbank economist Nick Kounis said in a note.

"The move to recapitalize banks directly is a big deal and will help to break the 'vicious circle' between banks and sovereigns that has been at the very heart of this crisis."

While the ESM's ability to inject capital directly into banks will come too late to help Spain recapitalize its debt-laden lenders immediately this year, Madrid should benefit next year when the banks should be able to repay the state money borrowed from the ESM, eurozone officials said.

The ESM will be empowered to make such direct loans to banks once a single European banking supervisory body is set up. Merkel said finance ministers would have to work out whether the state or the banks would be legally responsible for repayment of the loans thereafter.

Italy's Labor Reforms Passed

Italy's parliament approved a controversial labor market reform on Wednesday in time for Monti to arrive at key Brussels summit with it in hand.

The text was adopted with a large majority of 393 in favor and 74 against, with 46 abstentions.

The government won four confidence votes on the text as the parliament fast-tracked steps necessary for approval on Tuesday and Wednesday morning.

Monti had stressed to parliament that it was "important that Italy arrives at the summit with the force of a parliament-government tandem."

The project, which was unveiled in March after months of bitter disputes with trade unions, is based on the Danish "flexicurity" model, which aims to ensure both flexibility and job security in the labor market.

It includes incentives for employers to hire workers but also eases the procedure for letting them go in case of a downturn, and will help young people get jobs though apprenticeships, in a country hit by high youth unemployment.

Workers will also be eligible for a modernized welfare scheme from 2017.

Greater labor flexibility is one of the reforms European and international financial bodies have long advised Italy to adopt to invigorate its economy.

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