EU Summit Strife Berlin and Paris Compromise on Bank Oversight

Ahead of this week's European Union summit in Brussels, Chancellor Merkel and French President Hollande staged a public battle over euro-zone reform. On Thursday night, however, the two quickly reached a compromise on the introduction of banking oversight. But difficult questions remain.
Merkel and Hollande were able to reach a compromise on Thursday night in Brussels.

Merkel and Hollande were able to reach a compromise on Thursday night in Brussels.

Foto: CHRISTIAN HARTMANN/ REUTERS

European leaders have reached agreement on the roadmap to a banking oversight regime in the euro zone. Following a public back-and-forth  between German Chancellor Angela Merkel and French President François Hollande, the 27 European Union heads of state and government on Thursday night found a compromise at their two-day summit in Brussels.

The agreement calls for the legal framework for financial sector oversight  to be completed by the end of the year, but actual implementation won't come until later. The oversight regime will be introduced "in the course of 2013," the summit's closing statement reads.

In a brief press conference following the summit's first night of meetings, Merkel said that an oversight agency takes longer than just two months to develop. She declined, however, to pinpoint a concrete date by which the agency would be operational. "We don't want to disappoint the markets by continuing to make short-term declarations," she said.

The compromise is a victory for Merkel. Both France and Spain had been emphatic that bank oversight begin on Jan. 1, 2013. Berlin, however, insisted that any such regime be thoroughly planned and resisted efforts to move quickly, receiving support from such non-euro-zone countries as Sweden and the Czech Republic. Over a dinner of roast veal and spinach, Hollande and his allies backed down.

After Thursday night negotiations concluded, the French president was eager to stress the New Year's Day deadline for the completion of the legal framework and said it would only take several additional weeks before the agency could begin operations. Merkel, though, emphasized that there would be no direct aid paid out to European financial institutions from the European Stability Mechanism, the permanent euro bailout fund, before the bank oversight system was fully functional.

Tense Atmosphere

Hollande told journalists that the compromise agreement had been reached quickly, belying the tense atmosphere between Paris and Berlin on the eve of the summit. Indeed, as the week progressed, it seemed as though the conflict between Europe's most important protagonists had escalated.

The French president in particular seemed to be on the war path. He gave a joint interview to several European dailies which included what seemed to be a direct attack on the chancellor. "Those who speak most passionately about political union are often the ones who hesitate the most when it comes to making pressing decisions," he said. His feistiness did not abate immediately upon his arrival in Brussels. Before meetings began, he insisted that the summit would be focusing on the planned banking union and not on fiscal union, Merkel's preferred project. He also accused Merkel of dragging her feet on bank oversight due to the approaching 2013 general elections in Germany.

Merkel didn't shy away from confrontation either. During her speech to German parliament on Thursday prior to her departure for Brussels, she threw her support behind Finance Minister Wolfgang Schäuble's proposal , made earlier in the week, for a super commissioner to monitor, and even veto, national budgets of euro-zone member states. Hollande sees the proposal as nothing more than a diversionary tactic. Still, Merkel did send a signal that she was not intent on remaining confrontational by arguing in favor of a euro-zone "solidarity fund" that could be used to support the currency union's weaker members. The word "solidarity" was deliberately chosen: It is one of Hollande's favorite terms when discussing the euro crisis.

Hollande, however, was not to be distracted. A last minute bilateral meeting between the two leaders proved initially unsuccessful in finding a compromise, according to EU diplomats. The French leader continued to insist on a Jan. 1 start date for financial sector oversight.

Difficult Questions

Merkel, for her part, remained stubborn in her view that such a powerful agency could not simply be created from scratch in just a few months. "We are of course working as quickly as we can on the project, but do not believe that the agency will be able to begin its work on Jan. 1, 2013," a German government official told the press during the working dinner in Brussels. Before that can happen, the official said, a number of difficult questions must be answered, including how European Union countries not belonging to the currency union should be treated and how to deal with banks that do business both inside and outside of the euro zone.

Swedish Prime Minister Fredrik Reinfeldt and his Czech counterpart Petr Necas likewise warned against moving too quickly. Reinfeldt said that he wouldn't agree to a bank oversight regime until all of the details had been ironed out. The agency is to operate under the auspices of the European Central Bank and will be responsible for overseeing all 6,000 euro-zone banks. All 27 European Union members, however, must agree to the creation of the agency. Germany had been fighting for a more limited oversight architecture monitoring just the largest of euro-zone banks.

France and Spain are pushing for the quick establishment of a bank oversight system because it is a prerequisite for banks to be able to draw direct aid from the ESM. Spain and Ireland, in particular, had been hoping for a quick resolution so their banks could access such aid.

The roadmap that has now been agreed upon is an advantageous one for Merkel. It gives her the possibility to potentially push back the introduction of the oversight agency -- and thus the controversial provision of direct ESM aid to banks -- until after German elections next September. The delay, however, might create some turbulence on the financial markets. According to analysts, ESM aid for Spanish and Irish banks had already been priced in.

In addition to the tense standoff, the first evening of the two-day summit also had its light moments. European Commission President Herman Van Rompuy told the gathered leaders that he hoped they would all join him in Oslo in December to accept the Nobel Peace Prize. Merkel immediately accepted the invitation and asked her colleagues to do the same. But British Prime Minister David Cameron, an EU skeptic , quickly declined. Instead, he said, one should send 27 children from the EU to accept the prize.

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