European leaders announced overnight that they had agreed on several steps aimed at easing the European debt crisis. First, leaders announced that they would commit €120 billion of funds to growth initiatives.

Next, in the wee hours leaders announced the formation of a single supervisory mechanism for the Eurozone banking system, marking a first step towards a banking union.

Finally, the summit produced an agreement on measures aimed at reducing soaring borrowing costs for Spain and Italy via the use of existing bailout funds.

In a statement issued after the meeting, the leaders said: "We affirm that it is imperative to break the vicious circle between banks and sovereigns."

Once the new supervisory mechanism is in place, the ESM (the permanent bailout fund) will be allowed to directly recapitalize troubled Eurozone banks. In a key development, ESM loans will no longer subordinate existing debt.

In an effort to address the funding pressures on the periphery countries of the Eurozone, the statement highlighted a strong commitment to using the region’s bailout funds in a flexible and efficient manner. The goal is to help stabilize markets in countries that have committed to fiscal and structural reforms.

StreetAccount reports that the key takeaway here is that countries that ask for external support will no be longer be mandated to pursue additional reforms, though their commitments will be reflected in a memorandum of understanding. However, the statement did not discuss the issue of ECB involvement (i.e. the leverage dynamic), which is particularly important given concerns about the adequacy of the bailout mechanism's firepower.

According to the WSJ, the measures to help Spain and Italy reduce their borrowing costs in the open market will be fleshed out by July 9 at a meeting of the Eurozone finance ministers. According to the Eurozone statement, the proposal to create "a single supervisory mechanism" for the banks would be considered "as a matter of urgency" by the end of 2012.

The statement did not mention anything about longer-term measures such as a pan-European resolution or deposit protection scheme, which are considered crucial to help breaking the adverse feedback loop between banks and sovereigns. Recall that these measures are likely to be part of a roadmap towards deeper fiscal and political integration to be finalized by the December summit.

Global markets have rallied on the news summit news today. However, there are some concerns that the latest deal may provide only a temporary relief in the markets. As has been the case with EU plans, one of the big issues regarding the statement was its lack of details.

Analysts note that the timing of the plans was another issue given that direct bank recapitalizations will not be an option until the single supervisory mechanism is put in place. And finally, the funding of the bailout funds is another issue mentioned. Recall that the EFSF has to fund itself in the open market and there has been no indication from Germany that it is willing to soften its opposition to granting the ESM a banking license.

But for now at least, it’s “risk on.”

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Other stories on Europe to review:

• Summit Preview - The Building Blocks to Greater Integration"
  
• Eurozone Preliminary PMI's Remain Weak in June
  
• Greece Has Formed a Government
  
• Eurozone ZEW Index Continues to Decline
  
• German ZEW Index Slides in June
  
• Greek Voters Support Euro and Bailout
  
• Spain Downgraded at Moody's
  
• Eurozone Industrial Production Declines
  
• Spanish Banks To Get 100 Billion Bailout
  
• ECB Leaves Rates Unchanged; Keeps Hope for Action Alive
  
• Germany's Industrial Production Falls

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