BRUSSELS (MNI) – EU leaders Thursday night retreated from a
commitment made last June to have a single supervisory system for
Eurozone banks operational by January 1, 2013.

Instead, they said that they would now aim to agree on the legal
framework for the plan by the end of this year and then gradually
implement it in 2013.

EU leaders have set themselves “the objective of agreeing on the
legislative framework by January 1, 2013,” EU Council President Herman
Van Rompuy said at the end of a ten-hour summit here. “Work on the
operational implementation will take place in the course of 2013,” he
said, adding that the European Central Bank would “do its utmost to
establish as soon as possible” an operational system.

European Commission President Jose Manuel Barroso said that
European Central Bank President Mario Draghi had told EU leaders the ECB
would likely be able to implement the agreement in less than a year but
would certainly need more than one or two months.

“It is not because we agree a law that the next day we have all the
logistical framework in place,” Van Rompuy said, adding, “I can’t give
you a precise date.”

European finance ministers will work out the rules governing the
European Stability Mechanism’s power to directly recapitalize banks, Van
Rompuy said.

The shifting of the goal post is a compromise between the European
Commission, France and peripheral Eurozone states, who wanted a common
supervisory system in place quickly, and about half a dozen countries –
led by Germany – that wanted to take more time to iron out some of the
complex and controversial details.

The countries and Commission officials that have been pushing for
quick implementation want the joint supervisory system in place quickly
so that the currency bloc’s new bailout fund, the European Stability
Mechanism, can be authorized to inject capital directly into struggling
banks, as the EU leaders agreed in June.

Speaking after the meeting, German Chancellor Angela Merkel
repeated that “quality must come before speed.” She stressed that the
ECB “will not take up the practical task” of supervision in January, but
instead will be assigned to work out the operational details “over the
course of 2013.”

Merkel also maintained that the leaders had agreed direct bank
recapitalizations by the ESM could not take place until the “practical
completion of banking supervision” under the ECB.

“Our goal is a banking supervisor that deserves the name,” Merkel
said, adding that just the task of completing the legal framework by the
end of this year was a difficult one.

French President Francois Hollande noted that the summit session
had focused almost entirely on the bank supervision issue, with only
short discussions of Greece, Spain, and the tense social situations
facing countries that are implementing draconian austerity measures.

Hollande said that the creation of joint banking supervision in the
Eurozone was vital for restoration of investor confidence in the
currency area. “The markets must know that there will be a [common] bank
supervisor for the Eurozone in 2013,” he said.

He also downplayed recent disagreements with Germany over plans for
a joint banking supervisor, saying the nations were “in perfect
agreement” on the subject tonight.

Hollande said that with its moves towards greater integration, EU
leaders were finally “resolving problems that have plagued us for many
years and made EMU vulnerable.” He declared that “the worst [of the
crisis] is past,” though it is not yet over.

With regard to the plan for a joint EMU banking supervisor, “there
is still a hell of a lot to do by December,” a senior Commission
official confessed to journalists. “There are lots of outstanding
issues.” He cited details such as the scope of the new supervisor’s
authority, voting weights, and divergent views over how soon the ESM can
start direct capital injections after an agreement is finalized.

Germany is alone in pushing for centralized supervision to be
limited to only the largest banks. But it is supported by other
countries, including the Netherlands and Finland, in the view that the
ESM’s power to directly recapitalize banks should come only after an
“effective” supervisory system has been established.

The European Commission’s plan to empower a new Supervisory Board
at the European Central Bank, which would assume ultimate authority for
supervising the Eurozone’s 6000 banks, has also run into objections from
the Council of the EU, the EU legislative body representing member
governments, which has argued that it risks undermining the power of the
ECB’s Governing Council as it is enshrined in the EU treaty.

“We need to find a way to make the Governing Council [of the ECB]
the formal decision making board while allowing the supervisory council
to prepare those decisions,” the Commission official said.

In their final communique, EU leaders said that there was a “need
to ensure a clear separation between ECB monetary policy and supervision
functions, and the equitable treatment and representation of both euro
and non-euro area members states.”

“An acceptable and balanced solution is needed regarding changes to
voting modalities and decisions under the EBA,” the EU leaders said.

The leaders steered clear of a common stand on future elements of
Europe’s plans for a ‘banking union’ saying only that they noted the
European Commission’s plan to propose a single resolution mechanism for
failing banks once current proposals on harmonizing such programmes and
deposit guarantee schemes have been adopted.

Proposals floated by Van Rompuy, Barroso, ECB President Mario
Draghi and Eurogroup President Jean-Claude Juncker, suggesting the
possibility of a Eurozone ‘fiscal capacity’ and binding reform contracts
between governments and the EU, will be further explored before the EU
leaders’ last summit of the year in December, they said.

No mention was made of a German proposal for a European ‘budget
tsar’ with the power to shoot down national budgets.

EU leaders also issued a statement welcoming Greece’s progress on
implementing reforms, while urging continued efforts.

“These conditions will allow Greece to achieve renewed growth and
will ensure its future in the euro area,” their statement said.

–Brussels Newsroom, pkoh@mni-news.com; +324-952-28374

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