The European Union reached a landmark deal on Thursday to make the European Central Bank the bloc's top banking supervisor, giving EU leaders greater confidence that they are gaining the upper hand over the euro zone's debt crisis.
EU finance ministers forged a deal on the single supervisor in the early hours of Thursday after marathon talks. Leaders will give their stamp of approval at a summit starting later in the day, their last of 2012, and also discuss closer fiscal ties for their troubled currency area.
After a hectic year of crisis management, during which Greece had a close brush with the euro zone exit, getting an agreement on the first stage of a banking union is a victory for the EU and represents a bold step towards pooling sovereignty.
"The importance of the deal cannot be assessed too highly," German Chancellor Angela Merkel, Europe's most powerful leader, told parliament in Berlin before heading to Brussels. "We succeeded in securing Germany's key demands."
But there will be no time to relax. The next stages of banking union - creating a resolution fund for winding up troubled banks and coordinating deposit guarantees to protect savers - will be fought over even harder. And then there will be political and financial hurdles to negotiate through the year.
With Silvio Berlusconi vowing to contest an Italian election early next year, a full bailout of Spain still on the cards and a German general election in September casting a long shadow, 2013 promises to be the EU's fourth turbulent year in a row, and that's without mentioning Greece,Ireland or Portugal.
The immediate priority is to finalize the legal framework for banking union and get the backing of the European Parliament. Then the ECB must hire staff and decide how to carry out its mandate. It may not start supervision until April at earliest, and will only be fully operational in March 2014.
Officials said the ECB would regulate some 150 to 200 banks directly, mostly major cross-border systemic lenders and state aided institutions, with the power to delve into all 6,000 banks in case of problems.
"It's very good news that shows that step-by-step the euro zone and the European Union are coming out of the crisis," French Finance Minister Pierre Moscovici told reporters.
Completing such a complex process would be one of the EU's biggest achievements since the region's debt crisis erupted in early 2010, and might go some way to severing the so-called doom loop between indebted banks and shaky governments.
But it would only be the first step in building a banking union, that also entails creating a resolution authority and fund to wind up failed banks and coordinating deposit guarantee schemes across the euro zone to avoid bank runs.
The exercise is likely to take several years and officials see it is just part of a masterplan to bolster the architecture of the euro zone and prevent any repeat of a crisis that nearly tore the single currency project apart.
It promises to be a long and tortuous journey requiring political commitment from euro zone and non-euro members alike, something that countries such as Britain, with a restive Eurosceptic population, will find particularly stressful.
MINEFIELD AHEAD
Each step towards closer union means a greater surrender of sovereignty by independent nations and spurs a political backlash, especially in times of economic hardship, social tension and high unemployment.
European Council President Herman Van Rompuy and the heads of the European Commission, European Central Bank and Eurogroup have put forward a blueprint for closer euro zone fiscal, economic and political integration alongside the banking union.
But Merkel has lowered expectations for progress on that agenda at the summit, telling lawmakers that EU leaders should focus instead on steps that can be achieved within six months, notably to improve economic competitiveness.
She is determined not to frighten German taxpayers with talk of sharing more liability for banks or debts, and wants to avoid any such decisions until after the election in Germany, with campaigning already beginning to warm up.
"Germany rejects the permanent mutualisation of debts - in whatever form," Merkel told parliament on Thursday.
Binding the euro zone more tightly together to underpin the currency union is driving some non-euro states such as Britain and Sweden to question their relationship with Europe, while others such as Poland are keen to stay close to the core.
The banking union - which neither Britain nor Sweden will join, even if they reluctantly let the ECB take responsibility for oversight - is just the first obstacle in a minefield ahead.
Asked about banking union on Wednesday, Sweden's finance minister said approval of it would mark a "sad day for Europe".
"There is a move now towards euro-banks, euro-taxes, euro-transfers, euro-commission," Anders Borg told reporters.
"We think those are steps in the wrong direction. It might be very popular among the Eurocrats, but I think there are very few Europeans actually wanting these developments."
While the debt crisis continues to weigh heavily on Europe's economy, leaders will have to navigate the pitfalls of electoral politics in Italy, Germany, Cyprus and elsewhere.
Italy is a particular concern if the next government rows back on any of the economic reforms put in place by technocrat Prime Minister Mario Monti, whose time in office has helped stabilize financial markets and stave off the crisis.
Meanwhile, the original sovereign-debt problems in Greece will not be fully resolved, while Ireland and Portugal face a struggle to emerge from their bailout programs and regain market access by the end of 2013.
Greece's successful buying back of its own debt will help reduce its debt burden and will ensure that the next slice of emergency funds is released by the euro zone and International Monetary Fund, but there is a growing acknowledgement that Athens will need debt forgiveness in the years ahead.
In June and July, euro zone leaders came close to letting Greece go from the currency bloc. They resolved to keep it in, doing whatever it would take to get it back on its feet. Having taken that decision, they now have to bear the costs, however large and uncomfortable they may be.
© Thomson Reuters.
