European Union leaders capped a third year of debt-crisismanagement with Greece obtaining fresh financial aid, a euro bankregulator taking shape and Germany and France sparring over what todo next.

German Chancellor Angela Merkel and French President FrancoisHollande, stewards of the euro area's top two economies, promotedconflicting visions of how to revamp the currency bloc once thefiscal crisis subsides.

“Are there countries in the euro zone that don't want moretransfers? Yes, there are some,” Hollande told reporters after aBrussels summit, the 22nd since Greece's debt burst onto the agendain early 2010. “We can't just be constrained by countries thatdon't want to go further.”

Progress in stabilizing Greece and calming bond markets liftedexpectations that Europe is going beyond stopgap policy making,often at all-night negotiating sessions, to put a truly fail-safesystem into place.

It took two nocturnes to chart the next steps, starting with anaccord by finance ministers at 4:30 a.m. yesterday to make theEuropean Central Bank the hub of bank supervision by March 2014 forthe 17 countries using the euro. By noon, a deal was forged torelease 49.1 billion euros ($64.3 billion) for Greece, followed bythe leaders' future-of-Europe deliberations until 2 a.m. today.

The euro traded at $1.3075 at 2:15 p.m. Brussels time, barelychanged from $1.2960 at the start of 2012. During the year it neverfell below its January 1999 debut rate of $1.1668, a sign that forall the turmoil, investors felt the currency's survival was neverin jeopardy.

Financial-market tensions have abated, thanks mainly to a pledgeby the ECB, first made in late July and yet to be acted on, to puta floor under the bond markets of vulnerable countries such asSpain or Italy.

“It is still possible that an accident will precipitate thecollapse of the euro zone,” the Washington-based BrookingsInstitution said in a report this week. “What this narrativemisses, however, is the other important part of the story — howEuropean leaders, at the same time as they are battling difficulteconomic conditions, are slowly building more solid foundations forthe euro zone.”

Euro Road Map

Accords on bank supervision and Greece's next disbursement leftthe leaders to focus on a “road map” for turning the euro zone intoa “genuine” economic union over the next 5 to 10 years, with modelssuch as the federal systems in the U.S. and Switzerland.

With Germany heading for elections in September 2013, Merkel,Europe's dominant policy maker, ruled out adding to the burden onher voters, the main underwriters of 486 billion euros in rescueloans granted since 2010.

A strategy under discussion to handle failing banks “may not beat the cost of the taxpayers but has to be structured so that thoseresponsible for the failure of the banks carry the burden,” Merkelsaid.

A half year of brainstorming over the euro's future tiltedfurther in Germany's direction, with any thought of the jointissuance of new debts or redemption of old ones banished from theroad map put together by EU President Herman Van Rompuy.

Luxembourg Prime Minister Jean-Claude Juncker, who contributedto the road map, said he was “quite dissatisfied” that its bolderrecommendations were dropped.

Even a less ambitious proposal for euro countries to pay into acommon fund to offset economic shocks was too much for Germany.Only a “limited” pool of “around 10 or 15 or 20 billion euros” willbe made available for countries that sign economic-reformcontracts, Merkel said.

That would be equal to at most 0.2 percent of euro-area grossdomestic product, less than the 2 percent that Bruegel, a Brusselsresearch institute, estimates would be needed for a shock-absorberbudget to cushion disruptions such as a jolt to energy prices.

In the opposite corner was Hollande, who took office in May onan anti-austerity platform and, in a break with the Berlin-Paristandem that guided the early stages of the crisis response, soughtallies in Spain and Italy to offset German dominance.

Merkel blocked Hollande's bid to have “future-orientedinvestments” bracketed out of budget-deficit calculations. Hollandetook solace in the prospect of even a bare-bones financing packagefor growth-boosting reforms. “I'll take it,” he said. “I'll takeeverything.”

Next Steps

The conflict will carry over into next year's debate on the pathtoward a banking union, with the goal of giving central authoritiesthe power, and the financing, to deal with failing banks. At stakeis when the 500 billion-euro European Stability Mechanism rescuefund would get the power to recapitalize banks directly,essentially using European money to clean up mistakes made at thenational level.

The fate of Greece — pummeled by 17 consecutive quarters ofrecession and 25.4 percent unemployment — hangs over the thedeliberations. Yesterday's agreement to release the first aidtranche in six months came with a pledge by European governments totake “additional measures” in case Greek debt reduction veers offtrack.

While another cut in Greece's bailout-loan rates and an increasein infrastructure funding would help fill in any remaining gaps,the policy makers hinted that outright debt forgiveness — still ataboo topic for Germany and its top-rated creditor allies — wouldbe on the table as well.

International Monetary Fund Managing Director Christine Lagarde,less constrained by European political sensitivities, was moreexplicit, saying the euro governments made “assurances to provideadditional debt relief if necessary.”

Bloomberg News

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