By JUERGEN BAETZ and ANGELA CHARLTONAssociated Press
BRUSSELS (AP) - Hard-fought deals on the European Union budget and funding future bank bailouts gave EU leaders a boost going into a summit Thursday, injecting fresh credibility into their efforts to end a spiral of financial and economic troubles.
But other challenges await the 27 EU leaders, who will hold talks in Brussels through Friday.
Unemployment is at a record high across the bloc, particularly for the young, who have been disproportionately punished by years of crisis and recession. But Germany, Europe's reluctant paymaster, has again dashed hopes of investing any new money to ease the problem.
The EU leaders will take stock of progress on the bloc's financial and economic policies just hours after two breakthrough agreements.
Early Thursday, the heads of the European Commission and European Parliament overcame months of divisions over a new seven-year, 960 billion euro ($1.3 trillion) budget, financing key EU projects through 2020.
The agreement was rapidly backed by Parliament's main caucus leaders, setting the stage for a swift approval vote next week. The budget includes the first cuts to EU spending in history, coming at a time when many of the bloc's countries are in recession and struggling to reduce their own national debt.
The budget determines what the EU can spend on common infrastructure like railway or road projects, farming subsidies and aid to poor countries. It's separate from national budgets - and much smaller. All 27 EU nations together form the world's biggest economy, worth some 13 trillion euros a year.
Crucially, the EU budget also includes money for the employment measures that EU leaders will be debating at this week's summit. No budget agreement would have meant no money for those projects.
Youth unemployment has topped 50 percent in some of southern Europe's crisis-hit economies such as Spain and Greece and affects almost one in four youth across the EU.
The bloc's biggest economy, Germany, acknowledges the severity of the problem, but again made it clear before the summit that EU funds won't be increased. Berlin insists that the main responsibility lies with the member states themselves, saying they have to reform their economies to encourage growth.
"The German government insists that the problems Europe and the eurozone have be tackled at the root and solved step by step," Chancellor Angela Merkel told the German Parliament ahead of the summit.
She added that Germany was ready to set up a fund helping its peers in the 17-nation eurozone if they firmly commit to bold reforms restoring their nations' competitiveness. She gave no figure for the fund, but hinted that the scope would be small.
With significant stimulus policies off the table in times of belt-tightening across the bloc, leaders were instead touting a previously agreed capital increase for the European Investment Bank, which should boost lending to small and medium-sized companies in crisis-hit nations and foster job creation.
Thursday's deal on the budget came only hours after EU finance ministers reached a middle-of-the-night deal determining who will take losses on future bank bailouts, so that taxpayers don't have to. That is a key step toward establishing a so-called banking union for Europe, aimed at restoring stability after a tumultuous few years that have dragged down the global economy.
The set of rules determines the order in which investors and creditors will have to take losses when a bank is restructured or shut down, with a taxpayer-funded bailout being only a limited last resort.
A year ago, EU leaders pledged to tackle the eurozone's financial crisis by introducing a banking union. That would hand the supervision and rescue of banks to European institutions rather than leaving weaker member states to fend for themselves.
The project has stalled on many fronts, notably because richer countries fear they might have to pay for the banking woes of weaker countries. But Thursday's breakthrough offered new hope by establishing clear rules.
Following the 2008-2009 financial crisis, countries like Ireland, Britain and Germany each had to pump dozens of billions of fresh capital into ailing banks to avoid the financial system from collapsing.
To avoid that happening again, the new rules foresee for banks' creditors and shareholders to be the first to take losses. But if that isn't enough to prop up the lender, small companies and ordinary savers holding uninsured deposits worth more than 100,000 euros ($132,000) will also take a hit, officials said.
Those forced losses will go as high as 8 percent of a bank's total liabilities, only then would national governments kick in and top it up with a bailout possibly worth another 5 percent of the liabilities.
Raf Casert and Sylvain Plazy in Brussels and Geir Moulson in Berlin contributed to this report.
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