Is the E.U. Nearing a Landmark Banking Deal?

The crisis-battered euro zone got some rare cheer early Thursday with news that significant agreements had been made in creating a banking union across the European Union. Those unexpected advances by E.U. finance ministers towards establishing a Single Supervisory Mechanism (SSM) for the region will allow leaders of the 27-nation bloc meeting in Brussels Dec. 13-14 to hail another major step in getting Europe’s financial house in order.

Some officials didn’t bother waiting for EU heads to huddle as they cheered Thursday’s progress towards correcting the weaknesses that created the single currency’s crisis in the first place.

“This is an accord that creates unified bank supervision,” French Finance Minister Pierre Moscovici told reporters early Thursday, following all-night negotiations with his peers. “Little by little, we’re resolving the crisis in the euro zone. It’s a signal to the rest of the world: you can have confidence in the euro.”

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Though thorny details remain to be thrashed out, Thursday’s breakthrough was a pleasant surprise in light of the clashing positions various EU members—notably France, Germany, and the U.K.—had previously staked out. Just as amazing, equal measures of compromise appear to have been made all around. The result was a considerable bound towards a final accord granting the European Central Bank (ECB) the supervisory and backstop role for all EU banks whose assets surpass $39 billion, or represent 20% of their home nation GDP. Barring any changes, around 200 of Europe’s big banks would come under unified supervision, which will cover up to 85% of banking sectors in highly consolidated markets like France.

The SSM aims to create centralized oversight to prevent the kinds of lending and investment excesses by banks that occurred under national regulation—and transformed Europe’s sovereign debt problem into the full-blown euro crisis. The initiative will also allow the ECB to provide bail-out money directly to faltering banks, rather than forcing dangerously over-indebted national governments to continue assuming responsibility for those loans. If need be, meanwhile, the ECB will also be able to pronounce and organize the orderly closure of banks thought to be beyond salvaging.

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In other words, two main concerns of markets, economists, and leading euro nations about the single currency’s future are being addressed in the agreement: monetary union is being matched by increased convergence of fiscal policy and regulation; and gaps that had allowed excessive spending by banks and governments alike before the crisis are now being closed.

“We have reached the main points to establish a European banking supervisor that should take on its work in 2014,” declared German Finance Minister Wolfgang Schaeuble Thursday. His boss, Chancellor Angela Merkel, agreed, saying the advance “cannot be praised too highly.”

But if the previously clashing partners seemed to have all bent towards one another to create the breakthrough, problems with the looming union still remain.

For example, Germany successfully resisted French insistence the ECB have supervision of all Europe’s 6,000-odd banks, and succeeded in keeping smaller ones under control of national regulators. But deal will still accord the ECB  power to audit and restructure any bank it decides to regardless of size–somewhat mooting German victory on the matter. And Berlin isn’t happier about that than it is with the potential conflict of interest between the ECB’s primary mission—fighting inflation through monetary policy—and its additional mandate of tending to the health of (and at times extending loans to) Europe’s banking sector.

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Membership of the new union is also a sack of nails. All 17 euro-member countries will partake in the SSM, as will those that have not adopted the single currency but wish to place their banks under centralized supervision. Britain, Sweden and the Czech Republic—none of which use the euro—have said they’ll remain outside the banking union. Denmark—the only other EU nation besides Britain with a formal opt-out clause for adopting the euro one day—says it may join the SSM all the same.

Moreover, London demanded concessions on voting procedures that would have permitted it to oppose any new regulations or taxes approved by a euro zone majority, but which the UK felt would penalize the City as Europe’s financial center. Though Thursday’s agreements don’t grant the UK outright veto mechanism it sought, UK chancellor of the Exchequer George Osborne said agreements were made to ensure “countries that weren’t going to join the banking union, like Britain, were protected and their interests were protected”.

Yet despite Thursday’s advance by EU finance ministers, the banking union deal isn’t done just yet. Leaders have just three weeks to work through outstanding questions and finalize their deal before the Dec. 31 deadline they set for themselves expires. Chief among those may be exactly when the new European regulator will be up and fully functional.

Paris insists that happen by Jan. 1, 2014. Germany wants more time to be taken to assure the regulator is ready for effective operation and will hit the ground running. But not only for that reason. That delay would also help hedge against the SSM—and its bail-out function using, in considerable part, German taxpayer money—from becoming a troubling issue for Merkel in Germany’s October, 2013 general elections. But even that threat may be minimal to Merkel if continued integration of euro members achieves the goals behind that convergence: saving the single currency, surmounting the brutal crisis it has faced, and leaving the turmoil, fear, and financial waste of recent years forever behind.

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