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AFP - European leaders on Thursday clinched a deal on a new "growth pact" of measures worth some 120 billion euros to breathe life into floundering economies, EU president Herman Van Rompuy said : "What we already agreed is ... to boost the financing of the economy by around 120 billion euro for immediate growth measures," he told reporters on the first day of a two-day European Union summit.
The plan -- proposed by the eurozone's top four economies Germany, France, Italy and Spain -- foresees a package of measures to boost output and create jobs.
The pact would redirect unspent EU funds to the most needy countries and bolster the coffers of the European Investment Bank by boosting its capital base by 10 billion euros.
The EIB says the capital injection would allow it to raise funds in the markets to invest 60 billion euros in innovation, small- and medium-sized companies and infrastructure projects.
In addition, the investment bank will launch joint "project bonds" to finance 4.5 billion euros worth of infrastructure programmes.
Europe's most immediate task is to restore confidence in its banks.
All the bad loans made by eurozone banks (loans to mortgage borrowers, property speculators and even governments that may not be fully repaid) may need to be cleaned up (by injecting money into the banks), with the potential losses borne by the eurozone as a whole - because many national governments probably cannot afford it. In the case of Spain's banks, the current bailout deal leaves Spain's government sitting on all the losses.
Deposits at all eurozone banks may need to be guaranteed in euros by the eurozone as a whole, in order to stop panicky investors from moving their money from banks in southern European countries at risk of exiting the euro, to Germany (and increasingly to Switzerland and Denmark).

All of Europe's banks may need to be placed under a common regime of regulation and supervision, with troubled banks given equal access to rescue loans, and being wound up by a central authority when they go bust.
Europe's biggest long-term conundrum is how to stop governments like Spain or Italy going bust - and restore confidence in their commitment to stay within the euro - while ensuring that all governments are more responsible with their finances in future.
The biggest sticking point is eurobonds. A large chunk of eurozone government debt may need to be amalgamated - with governments standing behind each other's finances - in order to reinforce the commitment of governments to staying in the euro:
-- One full-blown version proposed by euro-think tank Bruegel would pool debts equal to perhaps 60% of eurozone GDP, which would (counter-intuitively) create strong market-based incentives for governments to be more prudent with their spending in future.
-- Another, lighter version proposed in Germany would only pool debts in excess of the 60% level, as a strictly temporary measure to make it easier for southern governments to borrow.
In the long-run, a US-style federal budget may be needed to cover the cost of recessions, so that individual governments don't risk going bust when their national economies get into trouble. For example, the cost of a minimum level of social security - especially unemployment benefits - could be permanently shared across the eurozone, paid for by a common income tax.
To make a full banking, fiscal and monetary union work, the eurozone governments would need to hand power to a central authority (the European Commission) that can pay for and supervise all of the above, while national governments accept that in future they have to keep their own spending strictly within their limited means.
As most of the above reforms involve Germany sharing its wealth with the rest of Europe (and all European nations handing power to Brussels), Berlin is insisting on the principle of no taxation without representation - in other words a move towards full federalism, with spending and regulation controlled by a directly elected presidency of the European Commission.