EU Rewrites Rule Book to Contain Financial Crisis

ATHENS -- The massive emergency fund assembled to defend the value of the euro is backed by a political gamble with an uncertain outcome: that European governments will rewrite a post-World War II social contract that has been generous to workers and retirees but has become increasingly unaffordable for an aging population.

The trillion-dollar program, to be underwritten largely by the 16 nations that use the euro and by the International Monetary Fund, represents a virtual discarding of Europe's rule book.

Under the rescue unveiled early Monday, governments that broke the currency union's spending restrictions are being offered a commitment of solidarity, with weak links such as Greece and Portugal supported by the creditworthiness of Germany's strong economy.

The European Central Bank will act as a bond broker of last resort for troubled European governments, a role so distant from its conservative, inflation-fighting personality that Jean-Claude Trichet, the bank's president, emphasized that the ECB remained "fiercely and totally independent" of political concerns.

The news invigorated investors. U.S. stocks had their best day in more than a year, with the Dow Jones industrial average rising 3.9 percent, the Standard & Poor's 500-stock index 4.4 percent and the Nasdaq composite index 4.8 percent. European stocks, which last week had their worst week in 18 months, soared. The Stoxx Europe 600 index was up 7.2 percent.

And though economists and other analysts generally agreed that the program was necessary to prevent a full-blown financial crisis, they also agreed that it won't work unless European governments follow through on promises to bring down their large deficits and restructure their economies to become more competitive. Otherwise, the "breathing room" created by the new fund will quickly disappear.