* Europe's leaders hold sixth summit of 2012
* Banking union and next steps the focus of discussion
* Recession, Spain bailout, elections loom next year
By Luke Baker
BRUSSELS, Dec 13 After a hectic year of crisis
management, during which Greece had a close brush with the euro
zone exit, European Union leaders aim to strengthen banking
oversight and work on wider reforms at their sixth summit of
2012 starting on Thursday.
With Silvio Berlusconi vowing to contest an Italian election
early next year, a full bailout of Spain still on the cards and
a German general election in September casting a long shadow,
2013 promises to be the EU's fourth turbulent year in a row, and
that's without mentioning Greece, Ireland or Portugal.
The immediate priority is to agree on the framework for a
banking union across the euro zone and wider EU, putting the
European Central Bank in charge of banking supervision to
strengthen risk management.
A meeting of EU finance ministers in Brussels on Wednesday
seemed close to a deal on which banks the ECB will oversee and
how its powers will be checked, paving the way for leaders to
approve it on Thursday or Friday.
If there is an agreement, and the European Parliament gives
its assent, the ECB should start monitoring the biggest banks
from March next year and be responsible for up to 6,000 banks
from Jan. 1, 2014.
Completing such a complex process would be one of the EU's
biggest achievements since the region's debt crisis erupted in
early 2010, and might go some way to severing the so-called doom
loop between indebted banks and shaky governments.
But it would only be the first step in building a banking
union, that also entails creating a resolution authority and
fund to wind up failed banks and coordinating deposit guarantee
schemes across the euro zone to avoid bank runs.
The exercise is likely to take several years and officials
see it is just the first part of a masterplan to bolster the
architecture of the euro zone and prevent any repeat of a crisis
that nearly tore the single currency project apart.
It promises to be a long and tortuous journey requiring
political commitment from euro zone and non-euro members alike,
something that countries such as Britain, with a restive
Eurosceptic population, will find particularly stressful.
"I feel that this political will is still present, otherwise
I would not be here anymore because I would have failed during
the euro zone crisis," Herman Van Rompuy, the president of the
European Council who chairs EU summits, said this week ahead of
the award of the Nobel peace prize to the EU.
"The facts show that in this global world, in order to
preserve our interests and promote our values, we need more
Each step towards closer union means a greater surrender of
sovereignty by independent nations and spurs a political
backlash, especially in times of economic hardship, social
tension and high unemployment.
Van Rompuy and the presidents of the European Commission,
the Eurogroup and the European Central Bank have put forward a
bold blueprint for closer fiscal, economic and political
integration in the euro zone alongside the banking union.
But German Chancellor Angela Merkel, Europe's most powerful
leader, lowered expectation for progress on that agenda ahead of
the summit, telling lawmakers on Tuesday that EU leaders should
focus on steps that can be achieved within six months.
She is determined not to frighten German taxpayers with talk
of eventually sharing more liability for banks or debts, and
certainly wants to avoid any such issue until after the election
in Germany, with campaigning already beginning to warm up.
Binding the euro zone more tightly together to underpin the
currency union is driving some non-euro states such as Britain
and Sweden to question their relationship with Europe, while
others such as Poland are keen to stay close to the core.
The banking union - which neither Britain nor Sweden will
join, even if they reluctantly let the ECB take responsibility
for oversight - is just the first obstacle in a minefield ahead.
Asked about banking union on Wednesday, Sweden's finance
minister said approval of it would mark a "sad day for Europe".
"There is a move now towards euro-banks, euro-taxes,
euro-transfers, euro-commission," Anders Borg told reporters.
"We think those are steps in the wrong direction. It might
be very popular among the Eurocrats, but I think there are very
few Europeans actually wanting these developments."
While the debt crisis continues to weigh heavily on Europe's
economy, leaders will have to navigate the pitfalls of electoral
politics in Italy, Germany, Cyprus and elsewhere.
Italy is a particular concern if the next government rows
back on any of the economic reforms put in place by technocrat
Prime Minister Mario Monti, whose time in office has helped
stabilise financial markets and stave off the crisis.
And after banking union, leaders must tackle the intricacies
of closer fiscal integration, including proposals for setting up
a separate budget known as a 'fiscal capacity' among the euro
zone states -- a fund to help tackle one-off economic shocks.
That will involve more pooling of sovereignty and greater
risk sharing, and may not be possible unless the EU's guiding
treaty is opened up for amendments, a long and cumbersome
process that no one wants until much further down the road.
Meanwhile, the original sovereign-debt problems in Greece
and Portugal will not be fully resolved.
Greece's successful buying back of its own debt will help
reduce its debt burden and will ensure that the next slice of
emergency funds is released by the euro zone and International
Monetary Fund, but there is a growing acknowledgement that
Athens will need debt forgiveness in the years ahead.
In June and July, euro zone leaders came close to letting
Greece go from the currency bloc. They resolved to keep it in,
doing whatever it would take to get it back on its feet. Having
taken that decision, they now have to bear the costs, however
large and uncomfortable they may be.
Asked about the possibility of forgiving Greek debt, Dutch
Prime Minister Mark Rutte, whose country remains triple-A rated
and is reluctant to extend more aid to needy states, said it
might have to be considered as soon as 2014.
"These are proposals which the Netherlands does not support
but you cannot rule it out," he told parliament.
The admission hints at the weary resignation in some EU
capitals - an acceptance that the crisis may no longer be acute,
but it is here to stay and it will be a long and painful grind
to overcome it.