* Europe's leaders hold sixth summit of 2012
* Closer fiscal links the focus of discussion
* Ministers clinch deal on banking supervision, Greek aid
* Recession, Spain bailout, elections loom next year
By John O'Donnell and Andreas Rinke
BRUSSELS, Dec 13 European governments clinched a
landmark deal on bank supervision and approved long-delayed aid
to Greece on Thursday, trumpeting the agreements as signs the
bloc is getting a grip on its problems after three years of deep
Leaders meeting in Brussels for their sixth and final summit
of 2012 faced warnings about complacency however, as they gear
up for a tough new year that will see Italian and German voters
go to the polls, and may bring a full bailout of Spain.
EU finance ministers agreed after marathon overnight talks
to create a single banking supervisor for the euro zone and
like-minded countries. The 27 leaders were set to give their
stamp of approval at a summit that opened in a mood of optimism.
The release of nearly 50 billion euros in fresh aid for
Greece, the heavily indebted state where the crisis began in
2009, averted a catastrophic default and the risk of a Greek
exit from the currency zone.
"Since the summer, we have made a lot of progress in our
efforts to overcome the immediate crisis in the euro zone,"
European Council President Herman Van Rompuy told the leaders as
he opened the summit. "The worst is now behind us but of course
much still needs to be done."
At the summit, held days after the EU received its Nobel
Prize in Oslo, leaders were to discuss closer fiscal integration
in the currency union, a drive that some officials worry has
lost momentum since ECB President Mario Draghi calmed markets by
pledging in July to do "whatever it takes" to save the euro.
European officials acknowledge privately that bolder steps
towards closer integration of the single currency area will be
on hold until after a German general election next September.
After a hectic year of crisis management, during which
Greece had a close brush with the euro zone exit, the bloc
appears to be heading into 2013 on a positive note.
ECB President Mario Draghi hailed the deal on banking
supervision, the first stage towards a banking union with more
pooled sovereignty, as an important step towards a stable
economic and monetary union.
German Chancellor Angela Merkel, Europe's most powerful
leader, said the agreement would boost trust and confidence in
the euro zone. And Olli Rehn, the EU commissioner for economic
and monetary affairs, said "Cassandras" who had predicted
disaster for the euro and a Greek exit had been proven wrong.
But there is little time to relax. The next stages of
banking union - creating a resolution fund for winding up
troubled banks and coordinating deposit guarantees to protect
savers - will be fought over even harder. And then there will be
political and financial hurdles to negotiate through the year.
"The fact that the situation in the financial markets is now
better than before should not be seen by the governments as a
way to procrastinate," European Commission President Jose Manuel
Barroso told reporters.
Much of southern Europe faces another year of grinding
recession with record unemployment and deepening poverty that
will tear at the fabric of wounded societies and may push
governments' efforts to reduce deficits further off course.
With Silvio Berlusconi vowing to contest an Italian election
early next year, a full bailout of Spain still on the cards and
the German vote casting a long shadow, 2013 promises to be the
EU's fourth turbulent year in a row, even without the risks from
bailout countries Greece, Ireland and Portugal.
The immediate priority is to finalise the legal framework
for banking union and get European Parliament backing. Then the
ECB must hire staff and decide how to carry out its mandate. It
is not expected to be fully operational before March 2014.
Under the deal sealed on Thursday, officials said the ECB
would regulate some 150 to 200 banks directly - all major
cross-border lenders and state aided institutions - with the
power to delve into all 6,000 banks in case of problems.
Non-euro Britain, Sweden and the Czech Republic, the most
sceptical EU members, allowed the agreement to go through but
said they would not be joining the banking union. Other non-euro
members left the decision open.
Completing such a complex process would be one of the EU's
biggest achievements since the region's debt crisis first
erupted three years ago. The aim is to begin to sever the
so-called doom loop between indebted banks and shaky governments
that has hit Ireland and Spain particularly hard.
Still, creating a full banking union, with powers to wind
down failed banks and guarantee deposits across the euro zone,
is likely to take several years. And it forms just part of the
bloc's masterplan to bolster the architecture of the euro zone
and prevent a repeat of the crisis that has threatened to tear
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.
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 heads of the European Commission, ECB and
Eurogroup put forward a bold blueprint for closer euro zone
fiscal, economic and political integration to the sumit.
But Merkel has lowered expectations for progress now on that
agenda, saying EU leaders should focus on steps notably to
improve economic competitiveness that can be implemented in the
She is determined not to frighten German taxpayers with talk
of sharing more liability for banks or debts, and wants to avoid
any such decisions until after the election in Germany, with
campaigning already beginning to warm up.
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.
Several participants at a pre-summit meeting of centre-right
leaders in Brussels urged Monti to stand as a candidate in an
election expected in February, but he gave no indication of his
intentions, a person at the meeting said.
Many European leaders fear a return of the erratic
billionaire Berlusconi, who abruptly chnaged course on
Wednesday, saying he would step aside if Monti agreed to lead
the centre-right into the election.
Meanwhile, the original sovereign-debt problems in Greece
will not be fully resolved, while Ireland and Portugal face a
struggle to emerge from their bailout programmes and regain
market access by the end of 2013.
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.