By Luke Baker
BRUSSELS (Reuters) - European officials struck two significant deals on banking resolution and their long-term budget in last-ditch negotiations early on Thursday, giving EU leaders a much needed lift at the start of a summit on youth unemployment and growth.
After late-night talks in Luxembourg that followed 18 hours of unsuccessful bargaining last week, European Union finance ministers finally agreed how to share the costs of future bank failures among investors and wealthy savers.
Separately, negotiators for the European Parliament, the European Commission and EU member governments clinched agreement on a 960 billion euro ($1.25 trillion) seven-year budget for the bloc for the period 2014-20, ending months of squabbling.
That cleared the way for a drama-free summit, at which EU Council President Herman Van Rompuy said the 27 leaders, joined by industry and trade union representatives, aimed to achieve results for young job seekers and small businesses.
They would adopt concrete measures to tackle "the credit crunch that is holding back the very companies that should be driving the recovery", Van Rompuy told the opening session.
Designed to shield European taxpayers from having to foot the bill for rescuing troubled banks, the banking resolution deal will be implemented on a national basis from 2018.
It also lays the ground for a single system to resolve failed banks in the euro zone and the 27-nation EU, the second stage of what policymakers call a European banking union, meant to strengthen supervision and stability of the financial sector.
The European Commission, the EU's executive, will put forward proposals for a single resolution mechanism next week, but any deal on it is a long way off because EU paymaster Germany opposes taking any liability for other countries' banks.
German Chancellor Angela Merkel welcomed the breakthrough on the EU budget, saying it would allow new spending on everything from agriculture to research, roads, bridges and development aid to move ahead.
"This is about improving our competitiveness with an eye to global competition and not mainly about creating ever new pots of resources," she said on arrival at the summit.
The European Parliament, which has gained greater power in recent years, had held up approval to demand more flexibility in how the money is spent and the right to redirect unspent funds instead of returning surpluses to member states.
In the end, a compromise was struck to the relief of EU officials, not least because the plan includes 6 billion euros EU leaders want to bring forward to launch programs to fight youth unemployment - the focus of the summit.
LOW GROWTH, NO JOB
With two major obstacles out of the way, EU leaders faced a far less awkward agenda during the two-day summit focused on unemployment, the most devastating legacy of the crisis that has bedevilled the EU since 2010.
The last summit before Germany's September general election - a key date in Europe's political calendar - may prove to be one of the least contentious of the past three years.
It is a far cry from the peak of the debt and economic turmoil of late 2011 and early-to-mid 2012, when there was a real threat of the euro zone collapsing.
Since then, thanks largely to a promise by the European Central Bank last July to do whatever it takes to defend the single currency, pressure from financial markets has eased and EU leaders have made some progress in reforming their economies.
As well as strict new rules on budget deficits and tighter oversight of budget spending plans by the European Commission, steps have been taken to improve banking supervision and weaken the link between indebted countries and problem banks.
British Prime Minister David Cameron, under pressure from eurosceptics in his own country, said the budget compromise must not affect Britain's annual rebate from EU coffers.
EU officials said a change in way rural development is funded in eastern Europe could potentially reduce London's entitlement to repayments by up to 350 million euros a year, but they said a technical solution could be found.
From late next year, the European Central Bank will become the single supervisor for virtually all the euro zone's 6,000 banks - the first stage of banking union.
The next step, the creation of a single resolution mechanism, is likely to prove a deeply divisive and drawn out process, with sharp differences between the views of the EU institutions, Germany, France and other member states.
Further-reaching plans for a single bank deposit guarantee across the euro zone look unlikely to gain traction due to German and north European opposition, although officially the idea remains on the table.
Most of Europe has been either in recession or on the brink of it for the past three years, while unemployment has steadily risen. EU unemployment now stands at 11 percent, the highest since records began, with youth unemployment a particular problem, especially in Spain, Greece, Italy, Portugal and Cyprus.
EU leaders have agreed to invest 6 billion euros in a "youth employment initiative" that would offer people under 25 a promise of a job, training or apprenticeship within four months of leaving education or being unemployed.
It's a bold promise, and one that will be targeted at regions of the EU where youth unemployment exceeds 25 percent, including much of Greece and Spain.
Politicians and sociologists are worried that extended unemployment for young Europeans will lead to a "lost generation" that never gets fully incorporated into economic life, with deep psychological and financial implications.
That will even further undermine Europe's ability to boost growth and compete with the rest of the world, especially China and a United States that is shifting its focus to Asia.
($1 = 0.7691 euros)
(Writing by Luke Baker; reporting by Robin Emmott, John O'Donnell, Martin Santa, Jan Strupczewski and Anders Melin in Brussels; Editing by Noah Barkin)