European leaders stepped up their efforts to stave off financial instability in the region by agreeing to a massive new stabilization arrangement, along with promises of more fiscal austerity.

The Council of the European Union agreed Monday to a package of measures designed to preserve financial stability in Europe, including the creation of the 500 billion euro European Financial Stabilization mechanism. It accelerated approval for financing support for Greece, and in addition, Portugal and Spain have committed to take significant consolidation measures in 2010 and 2011.

“In the wake of the crisis in Greece, the situation in financial markets is fragile and there was a risk of contagion which we needed to address. We have therefore taken the final steps of the support package for Greece, the establishment of a European stabilization mechanism and a strong commitment to accelerated fiscal consolidation, where warranted,” it said.

The Governing Council of the European Central Bank also agreed on several measures to address the severe tensions in certain market segments which it says “are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term.” These include market interventions, and efforts to boost liquidity.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, said it welcomed moves by the European Union and the European Central Bank to restore confidence and financial stability in the euro area. “These are strong measures that will help to secure global economic and financial stability, and preserve the global economic recovery. Implementation of actions to put public finances on a sustainable footing is key to restoring economic health in Europe,” he commented.

The EU Council added that it sill needs to make progress on financial market regulation and supervision reforms, in particular for derivative markets and rating agencies. “Furthermore, we need to continue to work on other initiatives, such as the stability fee, which aim at ensuring that the financial sector shall in future bear its share of burden in case of a crisis, also exploring the possibility of a global transaction tax. We also agreed to speed up work on crisis management and resolution,” it said.

IE