Published December 13, 2012
BRUSSELS – European governments clinched a landmark deal on bank supervision and approved long-delayed aid to Greece on Thursday, trumpeting the agreements as signs the bloc is getting a grip on its problems after three years of deep crisis.
Leaders meeting in Brussels for their sixth and final summit of 2012 faced warnings about complacency however, as they gear up for a tough new year that will see Italian and German voters go to the polls, and may bring a full bailout of Spain.
EU finance ministers agreed after marathon overnight talks to create a single banking supervisor for the euro zone and like-minded countries. The 27 leaders were set to give their stamp of approval at a summit that opened in a mood of optimism.
The release of nearly 50 billion euros in fresh aid for Greece, the heavily indebted state where the crisis began in 2009, averted a catastrophic default and the risk of a Greek exit from the currency zone.
"Since the summer, we have made a lot of progress in our efforts to overcome the immediate crisis in the euro zone," European Council President Herman Van Rompuy told the leaders as he opened the summit. "The worst is now behind us but of course much still needs to be done."
At the summit, held days after the EU received its Nobel Prize in Oslo, leaders were to discuss closer fiscal integration in the currency union, a drive that some officials worry has lost momentum since ECB President Mario Draghi calmed markets by pledging in July to do "whatever it takes" to save the euro.
European officials acknowledge privately that bolder steps towards closer integration of the single currency area will be on hold until after a German general election next September.
After a hectic year of crisis management, during which Greece had a close brush with the euro zone exit, the bloc appears to be heading into 2013 on a positive note.
ECB President Mario Draghi hailed the deal on banking supervision, the first stage towards a banking union with more pooled sovereignty, as an important step towards a stable economic and monetary union.
German Chancellor Angela Merkel, Europe's most powerful leader, said the agreement would boost trust and confidence in the euro zone. And Olli Rehn, the EU commissioner for economic and monetary affairs, said "Cassandras" who had predicted disaster for the euro and a Greek exit had been proven wrong.
But there is little 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.
"The fact that the situation in the financial markets is now better than before should not be seen by the governments as a way to procrastinate," European Commission President Jose Manuel Barroso told reporters.
Much of southern Europe faces another year of grinding recession with record unemployment and deepening poverty that will tear at the fabric of wounded societies and may push governments' efforts to reduce deficits further off course.
With Silvio Berlusconi vowing to contest an Italian election early next year, a full bailout of Spain still on the cards and the German vote casting a long shadow, 2013 promises to be the EU's fourth turbulent year in a row, even without the risks from bailout countries Greece, Ireland and Portugal.
The immediate priority is to finalise the legal framework for banking union and get European Parliament backing. Then the ECB must hire staff and decide how to carry out its mandate. It is not expected to be fully operational before March 2014.
Under the deal sealed on Thursday, officials said the ECB would regulate some 150 to 200 banks directly - all major cross-border lenders and state aided institutions - with the power to delve into all 6,000 banks in case of problems.
Non-euro Britain, Sweden and the Czech Republic, the most sceptical EU members, allowed the agreement to go through but said they would not be joining the banking union. Other non-euro members left the decision open.
Completing such a complex process would be one of the EU's biggest achievements since the region's debt crisis first erupted three years ago. The aim is to begin to sever the so-called doom loop between indebted banks and shaky governments that has hit Ireland and Spain particularly hard.
Still, creating a full banking union, with powers to wind down failed banks and guarantee deposits across the euro zone, is likely to take several years. And it forms just part of the bloc's masterplan to bolster the architecture of the euro zone and prevent a repeat of the crisis that has threatened to tear 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.
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.
Van Rompuy and the heads of the European Commission, ECB and Eurogroup put forward a bold blueprint for closer euro zone fiscal, economic and political integration to the sumit.
But Merkel has lowered expectations for progress now on that agenda, saying EU leaders should focus on steps notably to improve economic competitiveness that can be implemented in the coming months.
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.
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 stabilise financial markets and stave off the crisis.
Several participants at a pre-summit meeting of centre-right leaders in Brussels urged Monti to stand as a candidate in an election expected in February, but he gave no indication of his intentions, a person at the meeting said.
Many European leaders fear a return of the erratic billionaire Berlusconi, who abruptly chnaged course on Wednesday, saying he would step aside if Monti agreed to lead the centre-right into the election.
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 programmes 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.