LONDON — European leaders agreed Friday to set up a permanent $700 billion rescue fund to try to contain the continent’s debt crisis as fears mounted that Portugal will soon be forced to seek a bailout.
Wrapping up a two-day summit in Brussels, the European Union hoped the announcement of the permanent safety net after weeks of haggling would boost investor confidence and demonstrate the bloc’s commitment to ensuring the survival and stability of the euro.
But the meeting was overshadowed by political turmoil in Portugal, where lawmakers’ rejection of new austerity measures caused the government to collapse Wednesday and pushed Lisbon closer to asking for emergency aid. Many economists now think it’s only a matter of time before under-performing, debt-ridden Portugal becomes the third EU nation to require an embarrassing financial bailout.
The new rescue fund — dubbed the European Stability Mechanism, or ESM — is to debut in 2013, replacing a temporary bailout program cobbled together last year when the debt crisis exploded. Since then, the euro has endured a whipsaw year in the exchange market, and both Greece and Ireland have had to turn to their neighbors for emergency loans.
“This doesn’t mean the ESM is something we want to be used all the time — quite the contrary,” said Chancellor Angela Merkel of Germany, Europe’s economic powerhouse and the largest contributor to the rescue fund.
“We just want to demonstrate that we are well-prepared,” she said.
