Europe's growth pact: 120 bn euros to attack the crisis

(BRUSSELS) - The European Union compact for growth, which a European diplomat said was "being held hostage" by Italy and Spain, is aimed at injecting life into stalling economies and reversing record unemployment.

After a long string of summits focused on austerity and structural reforms, EU leaders sought to put the emphasis on pro-growth measures as they met for a two-day summit under global pressure to deliver a convincing crisis strategy.

EU president Herman Van Rompuy told a press conference in Brussels that "the key element is that we boost the financing of the economy by mobilising around 120 billion euros ($149 billion) for immediate growth measures."

He detailed the compact's key elements as follows.

A 10 billion euro increase in the capital of the European Investment Bank that will boost its overall lending capacity by 60 billion and help vulnerable countries fund economic expansion to "grow themselves out of the crisis."

Another 55 billion euros is to be scraped together from unused EU funds and earmarked for small- and medium-sized enterprises and youth employment schemes, the EU chief said.

Finally, the 27-member EU plans to launch a project bond pilot phase amounting to 4.5 billion euros to fund selected initiatives in the energy, transport and broadband communications sector.

But while the general outline and amount had been agreed to, Italy and Spain withheld final approval of the plan pending additional short-term measures that would ease pressure on bond markets where they are finding it much more costly to obtain funding.

"There are two countries that are very keen to ensure there is agreement on long-term measures and short-term measures," Van Rompuy told a news conference, adding: "I wouldn't say there is a blockage, discussions are ongoing."

One EU diplomat summed up the situation much more bluntly however, charging that the "Italians and the Spanish have taken the pact hostage."

The measures, amounting to a symbolic 1.0 percent of EU GDP, are not really new as they rehash proposals already made by the European Commission that had received little attention until now.

The deal was pushed by the new French president, Socialist Francois Hollande, who has warned that he would not ratify a German-inspired fiscal discipline pact without attaching a growth strategy to it.

BNP Paribas bank analyst Frederique Cerisier had commented earlier on expected details of the compact.

"It is not very substantial," she said. "Plus, it does not really include new public spending, which would be a real plan to relaunch the economy."