Merkel on Friday. EU leaders agreed to bring banks under supervision next year, but failed to pin down an exact date, dashing hopes of a quick move toward a full banking union.
Credit: John Thys

BRUSSELS, Belgium — After three years of last-gasp, make-or-break crisis meetings to save the euro, it's perhaps a positive sign that the latest European summit was so dull.

Leaders of the 27 European Union countries wrangled into the small hours of Friday morning over the minutiae of a plan to tighten supervision of Europe's banks, finally stitching together a deal at around 3 a.m.

"Tonight, I have the confirmation that the worst is behind us," French President Francois Hollande assured bleary-eyed reporters attending a news conference to explain how the banking plan is a significant step on the euro zone's long, uphill crawl out of its debt crisis.

The agreement came after Hollande and German Chancellor Angela Merkel overcame an unusually public spat to reach a compromise on banking rules.

Hollande secured a commitment that the EU will give the European Central Bank legal powers by Jan. 1 to supervise the finances of the more than 6,000 commercial banks in 17 euro zone countries.

In return, Merkel prevailed in establishing that the ECB will start to use its new powers to the full only later in 2013 — presumably after German elections in the fall.

The creation of a fully operational bank supervisor could trigger a spate of bailout requests from debt-ridden banks in shakier euro zone members — a prospect German voters are unlikely to welcome.

Merkel insisted the delay was needed to ensure the banking supervisor would be effective, not to boost her own re-election chances. "I never even thought of that," she told reporters.

"Our goal is banking supervision worthy of the name because we want to create something better than what we have at the moment," she explained. "This is not something you can do in one or two months."

Merkel's government had sought an even vaguer timetable for setting up the euro zone's snappily named Single Supervisory Mechanism and had pushed for its scope to be limited to Europe's largest banks instead of including Germany's patchwork of small regional lenders.

Hollande also managed to exclude from the summit agenda a German plan for appointing a European "super commissioner" with the power to veto euro zone governments’ national budgets if they would threaten to run up big deficits.

France views that as an unacceptable violation of national sovereignty.

The new supervisor is the first step toward setting up a "banking union" for the euro zone that would eventually give the ECB powers to rescue or shut down troubled banks and guarantee savers’ deposits.

The plan is aimed at breaking the so-called doom loop between troubled banks and national debt that’s been at the heart Europe's crisis, undermining the economies of countries from Greece to Ireland and Spain.

Once the banking supervisor is operational, the euro zone's $900 billion firewall funds will be cleared to intervene directly to support troubled banks.

Currently the funds can help banks only if national governments act as middlemen. The euro zone has agreed to lend the Spanish government up to $130 billion to refinance its stricken banks, for example. However, those loans would add to Spain's dangerously bloated sovereign debt.

Spain, Ireland, Cyprus and other struggling economies could have cause to gripe that Merkel was putting her domestic political concerns ahead of the wider European cause by delaying the application of the new banking rules.

Such a fudge by EU leaders would have sparked panic on the markets a few months ago. However, market pressure has eased since the establishment of the firewall funds and guarantees the ECB would intervene when needed to buy up the bonds of struggling countries.

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Spanish Prime Minister Mariano Rajoy took the delay in stride, saying he was "absolutely convinced" direct support for Spain's banks will kick in once the supervisor is in place next year.

"I'm very satisfied," he told a news conference. "A few months ago there was no discussion on the direct recapitalization of banks, it simply did not exist. Now it's very much on the table."

Markets seemed equally unfazed. Borrowing costs for Italy and Spain were reported at seven-month lows as the summit wrapped up on Friday. 

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