European Central Bank
(Reuters) - 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, reports Reuters.
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 finalise 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.
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.
"I feel that this political will is still present, otherwise I would not be here anymore because I would have failed during the euro zone crisis," Herman Van Rompuy, the president of the European Council who chairs EU summits, said this week ahead of the award of the Nobel peace prize to the EU.
"The facts show that in this global world, in order to preserve our interests and promote our values, we need more European integration."
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 presidents of the European Commission, the Eurogroup and the European Central Bank have put forward a bold blueprint for closer fiscal, economic and political integration in the euro zone alongside the banking union.
But Merkel has lowered expectations for progress on that agenda at the summit, telling lawmakers that EU leaders should focus on steps that can be achieved within six months, notably to improve economic competitiveness.