Leaders also discussed Greece’s future in the euro, expressing a statement of support for the country without explicitly saying they would keep it in the currency union.
Bleary-eyed after a short night of sleep, leaders on Friday tried to emphasize their commonalities. But it was difficult for them to paper over the differences that kept them negotiating until the wee hours of the morning.
“This cannot be done in one or two months,” German Chancellor Angela Merkel told reporters on Friday. “These are tricky and difficult legal questions… the political will, at any rate, is there.”
Until a new regulator is up and running, leaders said, banks would not be able to receive aid directly from Europe’s bailout fund, likely leaving the Spanish government with the bill for its faltering financial sector. Leaders said that they did not discuss a broader bailout for Spain during the meeting, though diplomats said Thursday that the Spanish government appeared poised to ask for help within weeks.
The new banking regulator would delegate supervision of smaller banks to national oversight, a concession to German desires to shield their politically powerful regional banks in an election year and also a concession to the reality that it may be difficult to set up an entirely new regulatory operation over the course of just a few months.
The issue has been contentious, with politicians reluctant to give up national control over their banks and the powerful financial sector worried that European regulators might be less accommodating than local officials, who can be more susceptible to political influence.
But the agreement was in some ways a step back from a June summit in which European officials committed to institute a euro-zone banking supervisor by the end of 2012 without specifying how broad its powers would be.
France and Germany clashed during Thursday’s meetings, which stretched more than nine hours. Ahead of the summit, Merkel endorsed creating a powerful European official who would have veto power over national budgets, a major giveaway of sovereignty. French President Francois Hollande accused her of paying more attention to her own domestic politics than to what is best for the 17-nation euro zone. But after the meeting, the leaders said they were happy with the results.
“The worst is behind us,” Hollande told reporters. “But everything is not over yet because we have to restore confidence and growth.”
Merkel called the plans “ambitious,” but the two leaders appeared to differ about when a regulator would actually be in a position to do meaningful work, with Hollande favoring an earlier target.
Other leaders said they needed to find a way to implement politically difficult measures even when markets are not threatening them. In the past months, that pressure has pushed leaders to take bigger steps toward addressing some of the root causes of the long-running crisis — which marked its third anniversary Thursday.
“Merkel has her own deadline, in September 2013,” Hollande told reporters Thursday as he entered the summit, referring to German elections next year.
Merkel appeared frustrated at the calls for quicker movement on the crisis response. “Quality must come before speed,” she said.
Merkel and Hollande met one-on-one immediately before the summit, but their disagreement was a sharp reminder that the German leader and Nicolas Sarkozy, Hollande’s predecessor, made a habit of entering the summits with a common agenda.
On the edge of resolution
For now, Europe appears to be on the verge of resolving its thorniest immediate problems, with a wide spectrum of leaders indicating that they would give Greece more time to fix its economy, rather than kicking it off the euro because it failed to live up to promises made when it received a bailout. And Spain appears poised to ask for a credit line from Europe’s bailout fund, according to European diplomats who spoke on the condition of anonymity because they were not authorized to discuss another country’s internal deliberations. That would give the European Central Bank the green light to begin intervening to ensure that Spain’s borrowing costs remain below dangerous levels.
But analysts warn that European economies remain dangerously fragile and that the market calm now could easily yield to panic in the face of ratings downgrades or continued poor economic performance in countries such as France and Italy.
“What has been clear over the past few weeks is how complacent euro-zone policymakers become when there’s a period of calm,” said Simon Tilford, chief economist of the London-based Center for European Reform. “There’s this gap between rhetoric and reality. And at the same time, you see a really worrisome deterioration of the economic picture across southern Europe.”
A euro-zone budget
The leaders were also discussing plans to set up a common euro-zone budget. That, too, will be fleshed out in more detail at another summit in December, and France and Germany differ on what to use the money for.
But Merkel’s suggestion of a powerful E.U. commissar who would have make-or-break power over national budgets appeared to rankle some European officials, who were surprised that she brought up the idea in a speech before Germany’s parliament on Thursday morning, just before she got on a plane for Brussels.
“It’s a no-go, full stop,” at least as Merkel has currently framed it, said one European diplomat, speaking on the condition of anonymity to frankly discuss his assessment of the proposal. Officials in other countries say their electorates would never consent to handing over final say on budgets to an unelected potentate in Brussels.
European leaders have raised the prospect of broader constitutional change to bolster the say of ordinary citizens in the complex workings of the E.U. But changes could take years, and leaders were planning to initiate the discussion in the coming months.
In the meantime, though, European economies are struggling under the overall pressure of high debt and unemployment and dismal growth prospects.
“We’ve moved from the acute to the chronic part of the crisis,” said Sony Kapoor, managing director of Re-Define, a think tank. “They can buy time, but it keeps getting more expensive.”