European leaders have agreed on a timetable to set up a single euro zone-wide banking supervisor run by the European Central Bank over the course of next year, a rapid pace that marks a victory for a French-led group that had pushed for a quick first step towards a banking union for the single currency.
But at an EU summit that stretched into the early hours of Friday morning, leaders failed to agree on the second key step in the process: when the euro zone's €500-billion ($653-billion U.S.) rescue fund will be able to start injecting cash directly into failing European banks, giving in to German resistance.
The direct bank recapitalization from the rescue fund, the European Stability Mechanism, are essential to Spain, which currently must borrow or self-finance about €60-billion to shore up its teetering financial sector, adding significantly to its sovereign debt levels. Once the ESM is given the authority to take over the process, those debts will shift off Madrid's books.
"This papers over significant differences over the direct recap," said one EU official. "The direct recap is going to be much more difficult."
Under the agreed timetable, a legal framework for the new ECB-based supervisor would be finalized by the end of this year, a deal that Herman Van Rompuy, the European Council president, argued was the most significant achievement of the summit's first day.
"We have a date in place now for the legislative framework, which we didn't have before – and that in itself is an important step forward," said Mr. Van Rompuy.
According to senior EU officials, Mario Draghi, the ECB chief, told leaders during the summit that it would take 6-12 months to get the supervisor up and running. Because Berlin has insisted the supervisor be effective before the ESM can begin cash injections into Spanish banks, those transactions are unlikely to occur until the second half of the year, around the time of Germany's national elections.
French President François Hollande has pushed hard for the direct recapitalization to occur more quickly, and a senior French official said Paris held out hope that it could begin as early as the first quarter of 2013.
"The quicker the mechanism is in place, the sooner recapitalization can take place," Mr. Hollande said at a news conference at the end of 10 hours of deliberations.
But Angela Merkel, the German chancellor, argued "it will take some time" before the bank supervisor is running effectively. "It's not just a matter of months," she said. Still, she conceded it would occur "over the course of 2013."
The agreement came after a day that saw increasingly contentious public conflict between Mr. Hollande and Ms. Merkel over the future direction of a euro zone banking union, with the French president arriving in Brussels demanding quick action on the establishment of the supervisor and his German counterpart telling the Bundestag in a morning speech that she would insist on a more prudent pace.
Although the timetable foresees all 6,000 euro zone banks being under the purview of the new ECB supervisor by the end of 2013, German officials insisted – with French acquiescence – that national supervisors would continue to have day-to-day responsibility for smaller, regional institutions. But the ECB would retain the ultimate power to intervene in any bank at any time.
Berlin has insisted on retaining some power at a national level in order to carve out some autonomy for its politically influential network of savings banks. But by making the ECB the ultimate authority, Paris and the European Commission will be content the supervision system will be uniform across the euro zone.