The Economist: The Red Eyed Walk to Banking Union

Tonight I have confirmation that the worst is over. President Francois Hollande's bullish assessment came at the end of yet another long night of debate at a European summit. His lectern was marked "Jeudi 18 Octobre" though it was well into vendredi 19. The main reason for his optimism was the pre dawn compromise on banking union, the euro zone's new banking supervisor was on course to be to be legally established by the end of the year, and would become operational in the course of 2013. So some time next year the euro zone's rescue fund, the European Stability Mechanism (ESM) could be used directly to capitalize troubled banks. As the French tell the story, European leaders were able to drag Germany back to last June's promise to create a banking union in order to break the vicious circle between weak banks and weak sovereigns, after it had tried to backpedal from several aspects of the deal. Indeed, the agreed timetable was faster than promised in June, noted Mr Hollande, and the ECB will have the power to supervise all 6,000 odd euro zone banks. There was other good news too: Greece seemed close to agreement with its creditors, thereby ensuring it would not be thrown out of the euro, a euro zone statement paid tribute to to Greece's "remarkable effort" and Spain's borrowing costs were coming down, thanks to the conditional readiness of the European Central Bank to intervene in bond markets. Even better for Mr Hollande was the fact that there had been no talk of the proposal by Angela Merkel, the German Chancellor, to create a super commissioner with the power to dictate budgetary policies to member states. All such ideas were for the future, said the president, if and when the treaties were revised, to create joint Eurobonds. The Germans seemed more downbeat and defensive. There would be no direct recapitalization before next year, noted Angela Merkel, the German chancellor.