European Union leaders struck a compromise on a roadmap to establish a single bank supervisor for the euro zone after Germany and France papered over differences on priorities for overcoming the bloc's debt crisis.
Diplomats reading from the text of draft conclusions of an EU summit in Brussels on Thursday said the leaders agreed on "the objective of completing the legal framework by the end of the year" with implementation "in the course of 2013".
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The point when the European Central Bank will effectively become the bloc's banking supervisor is important because it would open the way for the euro zone's bailout fund to recapitalise troubled banks directly, without adding to governments' debts.
EU Economic and Monetary Affairs Commissioner Olli Rehn said this was vital "to break the vicious circle between sovereigns and banks".
The deal, which leaves uncertainty over the scope of a European banking union, came after the leaders of Germany and France, Europe's two central powers, clashed over greater EU control of national budgets as well as bank supervision.
German Chancellor Angela Merkel demanded stronger authority for the executive European Commission to veto national budgets that breach EU rules, but French President Francois Hollande said the issue was not on the summit agenda and the priority was to get moving on a European banking union.
The two leaders met privately just before the start of the 22nd EU summit since the euro zone's debt crisis erupted nearly three years ago.
For once, the meeting was not under the intense pressure of financial markets, which have calmed since the ECB pledged last month to intervene decisively if needed to buy bonds of troubled euro zone states to preserve the euro.
Addressing parliament in Berlin earlier in the day, Merkel said quality was more important than speed in creating a new banking supervisor.
Germany is loath to see its politically sensitive savings and cooperative banks come under outside supervision and says European oversight should cover big cross-border banks only. It rejects any joint deposit guarantee under which richer countries might have to underwrite banks in poorer states.
Asked why he thought Merkel was dragging her feet, Hollande told reporters it could be related to Germany's electoral calendar, with a general election due in September 2013, adding that the two dominant EU powers had a duty to solve the crisis.
In her speech to parliament, Merkel skirted the issue of a possible credit line for Spain, which euro zone officials expect Madrid to request within weeks, but reiterated her desire to keep Greece in the currency area despite chronic debt problems.
In Athens, police clashed with protesters hurling stones and petrol bombs during a general strike that brought much of the near-bankrupt country to a standstill.
"We have made good progress on strengthening fiscal discipline with the fiscal pact but we are of the opinion, and I speak for the whole German government on this, that we could go a step further by giving Europe real rights of intervention in national budgets," Merkel told the Bundestag lower house.
A proposal by German Finance Minister Wolfgang Schaeuble to create a super-empowered European currency commissioner was a possible way forward, she said, and more European control called for a stronger European Parliament. Such moves would require EU treaty changes, which Hollande is keen to avoid.
Merkel also advocated the creation of a European fund to invest in specific projects in member states which she said could be fuelled by a financial transaction tax which 11 euro zone countries have said they will adopt.
Her call echoed a proposal for the 17-member euro zone to have its own budget -- known in EU jargon as a "fiscal capacity" -- on top of the 27-nation union's common budget, which mostly funds agriculture and aid to poorer regions.
A note circulated by European Council President Herman Van Rompuy said the proposed new pot of money could provide euro zone countries with insurance against economic shocks and support those that committed themselves contractually to structural reforms.
"Every member state, regardless of their income levels, would over time contribute," Van Rompuy wrote to EU leaders in the note seen by Reuters. "Therefore, this would not lead to permanent transfers across countries."
Several states, including the Netherlands, Finland and Austria, were uneasy at the idea but none rejected it outright.
Decisions on institutional reforms are not expected until a December summit.
SENSE OF URGENCY FADING?
Since the ECB said last month it was ready to buy the bonds of struggling euro zone states in unlimited amounts, state borrowing costs have fallen sharply and some of the pressure to move rapidly to resolve the crisis has dissipated.
Spain's 10-year bond yields sank to their lowest since February at an auction on Thursday, helped by Moody's decision this week to leave its credit rating at investment grade.
But rather than signalling that Madrid does not need help, Moody's verdict was predicated on Spain soon applying for a euro zone assistance programme to trigger ECB intervention.
The leaders agreed at their last summit in June to create a single banking supervisor under the ECB, but tricky legal issues remain and it may not be fully up and running until 2014, up to a year later than first expected.
Joerg Asmussen, the German member of the ECB's executive board, said on Wednesday the central bank would not be ready to start overseeing banks from early next year, and said it was more important to do it properly than to do it quickly.
The deeper the discussion on banking union goes, the more complex and problematic it gets.
Countries outside the euro zone -- particularly Britain, which has Europe's biggest banking sector -- are concerned their banks could be disadvantaged if a balance is not maintained between the ECB and its oversight of euro zone banks and the powers of other authorities to oversee non-euro zone banks.
And if non-euro zone countries such as Poland join the banking union, as policymakers are hoping, it is unclear what representation they would have within the ECB, since the central bank is currently answerable only to euro zone member states.