BRUSSELS, June 29 (Reuters) – EU leaders signed a growth and jobs pact on Friday that aims to pump 120 billion euros into the region’s stalled economy, but only about half of that money can be counted on quickly and officials have doubts about how effective the plan will be.

Conceived as way to counterbalance Germany’s focus on tight budgets, the French-backed pact aims to free up money to invest in infrastructure and jobs at a time when one in 10 euro zone workers are unemployed and the economy is on the brink of recession.

The pact was almost derailed at the eleventh hour, with Italy and Spain threatening to withdraw their support unless Germany agreed to action to bring down their spiralling borrowing costs – an undertaking that Berlin signed up to overnight.

“The key short-term challenge across Europe is to revive growth,” European Council President Herman Van Rompuy told a news conference on the second day of the summit in Brussels.

The pact “will mobilise 120 billion euros for immediate investment, which will boost the financing of the economy and help create jobs.”

But the only concrete step that leaders agreed was to increase the capital of the European Investment Bank’s by 10 billion euros, boosting its lending capacity by 60 billion.

Relying on 55 billion euros in unused aid for EU regions takes the plan’s envisaged funds up to 115 billion euros, but overlooks a dispute about whether the money is really available.

BRUSSELS, June 29 (Reuters) – Euro zone inflation held steady at a 16-month low in June, kept in check by a sharp fall in oil prices and supporting an already strong case for a near-term interest rate cut by the European Central Bank.

Consumer prices in the 17 countries sharing the euro rose 2.4 percent year on year in June, EU statistics office Eurostat said on Friday, the same rate as in May and as expected by economists in a Reuters poll.

The ECB left rates at a record low of 1 percent earlier this month. But many economists expect it to cut borrowing costs at its July 5 meeting, taking place against a darkening economic backdrop and after EU leaders agreed new crisis measures overnight to tackle the region’s debt crisis.

“There is no obstacle to an ECB rate cut from the side of inflation,” said Christoph Weil, an economist at Commerzbank, who expects a cut next Thursday.

A Reuters poll showed that 48 out of 71 economists expect the ECB to cut rates, in theory making it cheaper for the euro zone hard-pressed households and firms to borrow.

ECB President Mario Draghi has so far argued that it is up to governments – not the bank – to take steps to help calm the crisis that has intensified in recent weeks as Spain and Cyprus have become the fourth and fifth countries to seek a European rescue.

But the pressure appeared to be back on the ECB after euro zone leaders agreed in the early hours of Friday to take action to try to bring down Italy and Spain’s borrowing costs and to create a single supervisory body for euro zone banks.

BRUSSELS (Reuters) – Euro zone economic sentiment fell by more than expected in June, as managers of businesses and in factories across the currency area saw little reason for cheer as the region’s economy stalls, even in wealthier, northern nations.

The European Commission said on Thursday its economic sentiment index slipped by 0.6 points in the 17-nation euro zone to 89.9, compared to the 89.5 point average forecast in a Reuters poll. It was the index’s third consecutive monthly decline and the lowest level since the end of 2009.

As EU leaders meet for a summit in Brussels to try to find ways to resolve the debt crisis that has gradually spread across the continent since it began in Greece in January 2010, the mood continued to worsen at businesses.

“The sustained fiscal austerity and ‘muddling through’ approach to the crisis is clearly taking its toll on economic confidence across the region,” said ING economist Martin van Vliet in a note to clients. “Today’s figures are a further wake up call to euro zone leaders that… the crisis also needs a short term solution addressing the lack of growth.”

Factory managers said they were pessimistic about future orders of goods, from televisions to cars, while production levels and even current export order books – so far kept alive by U.S. and Chinese demand – had deteriorated.

Banking and finance, at the centre of the crisis after Spain requested a rescue for its banks this month, was also depressed, with confidence falling by the greatest margin of all industries and continuing a downward trend since early last year.

With one in 10 euro zone workers out of a job, households in southern Europe in particular are struggling and confidence among consumers fell slightly in June, with the Commission citing “increased unemployment fears” as a major factor.

LUXEMBOURG (Reuters) – The European Union lifted financial sanctions against Hungary on Friday after Budapest convinced its European partners it was committed to keeping spending within EU limits.

EU finance ministers in March blocked 495 million euros ($625 million) in EU funding from 2013 after losing patience with Hungary over its failure to meet its budget deficit targets.

But the finance chiefs reversed the March decision at a meeting in Luxembourg. Reuters reported earlier this week that ministers would take the decision, convinced that Prime Minister Viktor Orban had shifted policies to bring down a stubborn deficit.

“The money will be in our pockets and hopefully in the economy very soon,” Hungarian Economy Minister Gyorgy Matolcsy told Reuters during the meeting in Luxembourg.

European Commission President Jose Manuel Barroso already made a recommendation to finance ministers that they should lift the sanctions after the EU executive improved its forecast for Hungary’s fiscal deficit to 2.7 percent of economic output in 2013. That is within the EU’s 3 percent ceiling.

Budapest angered the Commission and other EU countries by failing to rein in its deficit in a sustainable manner since it joined the EU in 2004. The Commission’s new powers to police budget deficits across the bloc served to put more pressure on Orban’s government.

The sanctions, used for the first time against an EU country on a budget issue, marked a low point between Brussels and Orban, whose centralizing style prompted Barroso to raise concerns about authoritarianism in Hungary.

LUXEMBOURG, June 22 (Reuters) – European finance ministers examined ways to strengthen their banking sectors and break the link between troubled banks and indebted countries on Friday, with concerns about Spain’s stricken banking system top of their minds.

IMF Managing Director Christine Lagarde has urged the euro zone to channel aid directly to struggling banks rather than via governments, but Germany and others are opposed to such direct lending, which is not possible under current rules.

The discussion is part of a broader debate about how the European Union can move towards a ‘banking union’, including a pan-EU deposit guarantee scheme and a fund to resolve bad banks, to try to get on top of the 2-1/2-year sovereign debt crisis.

Lagarde said on Thursday that by allowing the euro zone’s rescue scheme, the European Stability Mechanism, to aid stricken lenders directly rather than via a programme of aid to a government, it would stop bank problems from exacerbating the difficulties of countries.

Arriving at Friday’s meeting, Luis de Guindos, Spain’s economy minister, said such a possibility may be open to Spain, which is set to receive up to 100 billion euros ($126 billion) of aid from the euro zone for its troubled banks.

“I think (direct bank recapitalisation) is a possibility,” he told reporters. “It is one of the fundamental elements to break the link between bank risk and sovereign risk.”

“This possibility is absolutely open to Spain if there is progress in the next few months (on the issue). The process of recapitalisation is not instantaneous,” he said.

LUXEMBOURG (Reuters) – The International Monetary Fund urged the euro zone on Thursday to channel aid directly to struggling banks rather than via governments and called for the European Central Bank to cut interest rates, saying the future of the euro was at stake.

The stark message from IMF Managing Director Christine Lagarde, delivered to euro zone finance ministers who met in Luxembourg, will increase pressure to forge a unified approach to tackling problems at struggling banks such as those in Spain.

“We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area,” Lagarde told a news conference after the meeting.

“A determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith,” she said. “At the moment, the viability of the European monetary system is questioned.”

Lagarde spelled out a plan that envisioned the issuance of jointly guaranteed euro zone debt as well as more centralized economic control in the 17 countries that use the euro.

As ministers prepared to provide up to 100 billion euros ($126 billion) in aid for Spain to shore up its stricken banks, Lagarde said financial support for banks should be given directly, rather than via the state.

Analysts believe such a model could entail allowing the euro zone’s permanent rescue scheme, the European Stability Mechanism (ESM) to directly inject capital into banks in return for a shareholding, or to lend at penalty rate of interest.

BRUSSELS (Reuters) – The fate of the European Union’s banks, struggling to ride out the debt crisis, will take centre stage on Friday when ministers turn to the question of forging a banking union, a crucial step to stand behind their troubled lenders and the euro.

Although the 17 countries in the euro zone share a single currency, their governments set their own economic course and have been left to resolve their national banking problems.

“The new focus is on the banks and integrating (the response) that reflects the situation on the ground and the situation in Spain,” one senior diplomat said ahead of the meeting of EU finance ministers in Luxembourg on Friday.

EU leaders will examine proposals next week at a summit meeting in Brussels for a process of integration that may seek to centralise economic decision-making in the euro zone.

Although it is likely to take years to realise, they hope that by embarking on this course, investors will be reassured about the euro’s future.

Establishing a banking union – with a single supervisor for big banks, a fund to wind down cross-border lenders in trouble and a common deposit guarantee scheme to protect savers – will be the first move in this direction.

“In a way, it may be easier to move on banks,” the diplomat said. “Banks is a technocratic affair, contrary to fiscal policy, which is bound up in national history and identity.”

MADRID/BRUSSELS (Reuters) – Spain’s borrowing costs will probably hit a new euro era high at a debt auction on Thursday, a few hours before it sheds light on the dire state of its weaker banks and possibly makes a formal request for European Union funds to rescue them.

Madrid should show that it can still borrow on financial markets at the sale of short and medium-term bonds. However, the amount raised will be modest and the price punishingly high as international investors steer clear of Spain, leaving the often troubled domestic banks to buy up the bonds.

Spain faces a hectic day on Thursday as the latest euro zone country in the firing line following Greece, Ireland and Portugal which have already taken sovereign bailouts.

In the morning the Treasury aims to borrow up to two billion euros ($2.5 billion) and in the afternoon the government will release an independent audit of the banks, which have been hammered by the effects of a property crash and a recession.

Then in the evening, Spain could make the formal request for up to 100 billion euros in aid for its weaker banks at a Luxembourg meeting of euro zone finance ministers, who already approved the plan informally earlier this month.

A lack of information on the bank rescue has helped to drive yields on Spanish government debt in recent weeks to levels at which the other struggling euro zone countries had to seek full sovereign bailouts, rather than just aid to recapitalize banks.

“The lack of details right now only serves to damage the situation. I say that as soon as we have the details of the audit, then we should ask for the plan to be enacted,” said a senior EU diplomat.