After more than a year of hard bargaining, European finance ministers on Wednesday reached a political agreement on a final piece of the bloc's planned banking union, which is the most ambitious step in integrating Europe's economy since the adoption of the common currency.
The ministers said they agreed on the guidelines for a new joint European institution in charge of closing down or propping up ailing banks, the so-called single resolution mechanism, complete with an arrangement to finance its operations.
"With the agreement ... on the resolution mechanism we have created the banking union's final legal pillar," German Finance Minister Wolfgang Schaeuble said.
Failure would have cast doubt on Europe's key project to stabilize its battered financial sector and protect national governments from being dragged down again by failing banks.
Law to be passed by May
The daylong talks in Brussels were the ministers' second attempt in as many weeks to strike a deal before year's end. They were under pressure to reach an agreement before a summit of the EU's 28 leaders Thursday in Brussels.
The deal reached shortly before midnight Wednesday also ensures the legislation can be sent to the European Parliament on time to secure its passage before the end of the current legislature's term in May, thus avoiding a delay of at least several months.
"If we continue ... on the path toward banking union then we will be able to continue the stabilization of the European currency as the basis for a return to stable growth in Europe," Schaeuble said.
One of the reasons why Europe got into such financial trouble was that countries like Ireland had to step in to save their banks when the financial crisis first exploded in 2007-8, eventually forcing the governments into seeking a bailout themselves.
In a first major step, the finance ministers agreed earlier this year to create a common supervisory authority for the eurozone's biggest banks.
For months, the 28 EU countries have been trading ideas over how to deal with sick or insolvent banks and the powers of the proposed agency tasked with executing the banking supervisor's decisions.
A preparatory meeting of the eurozone's 17 finance ministers on Tuesday reached an initial agreement on how to finance the bank rescue agency. It foresees that banks will have to provide 55 billion euros ($76 billion) over 10 years to pay for shutting down or spinning off ailing financial institutions.
Banks to foot the bill
The operating principle is that banks themselves and their creditors should foot the bill, and not governments and taxpayers.
Until the full amount in the centralized bank resolution fund will be available, closing or recapitalizing ailing banks will be paid for through a complex combination of funds from national bank rescue funds and the European rescue mechanism.
In the event a country doesn't have adequate resources to handle problem banks before the common fund comes on line, it could borrow from the permanent eurozone rescue fund, the 500-billion euro European Stability Mechanism.
"It is an extremely complicated legislation," acknowledged Lithuanian Finance Minister Rimantas Sadzius.
Fine points of the agreement still must be thrashed out by the ministers and their governments, and the whole sheaf of proposals must then be adopted by the European Parliament to become law.
But EU banking commissioner Michel Barnier told journalists that he was confident the new rulebook and agency for dealing with ailing banks "will be operational in 2015."
Concerns about the institution's legal footing and fears by some member states like Germany that they could lose control over their taxpayers' money in a joint European rescue fund have led to a cumbersome decision-making structure. To decide what to do with a failing bank, the centralized banking supervisor, the EU's executive arm and member governments may have to get involved.
European Central Bank president Mario Draghi had voiced concerns earlier this week that such a mechanism might be too unwieldy to act swiftly. But Schaeuble insisted that if need be, a decision could be taken "over a weekend."
Zsolt Darvas, a senior fellow at Brussels-based economic think-tank Bruegel, cautioned earlier Wednesday that there were major flaws with the regulatory plan being negotiated by the ministers. He said the mechanism foreseen for the transitional period doesn't do enough to break the "doom loop" between busted banks and national governments that led to economic havoc in Spain and Ireland.
"The glass is half-empty," he said.
Analysts also warned that even when the pot of 55 billion euros will be filled, it won't be enough to deal with a severe banking crisis, like the 2007-8 one, that affects several countries and leads to bailouts requiring hundreds of billions of euros.