* Merkel says euro zone fund will be limited
* Ministers clinch deal on banking supervision, Greek aid
* Recession, Spain bailout, elections loom next year
By Noah Barkin and Mark John
BRUSSELS, Dec 14 European leaders agreed on
Friday to press on with further steps to tackle their debt
crisis but German Chancellor Angela Merkel threw out a proposal
to boost risk-sharing with a fund to help euro zone states in
Germany's rejection of an idea strongly backed by France
showed the potential for more tensions over crisis management, a
day after the bloc clinched a deal on eurozone-wide banking
supervision and approved long-delayed aid to Greece.
After more than eight hours of late-night talks, leaders
promised to push ahead with setting up a mechanism to wind down
problem banks and launched talks on how to make countries stick
to economic targets with the help of a common fund.
But at an early morning news conference, Merkel made clear
that proposals for a substantial "shock absorber" fund and
common unemployment insurance were off the table, setting out a
far more restrained carrot-and-stick vision.
"We are talking about support linked to improvements in
competitiveness." Merkel told reporters of the fund envisaged.
"We are talking about a very limited budget. Not three digit
billions, rather 10 or 15 or 20 billion euros."
European Council President, backed by France and other
countries, proposed in the run-up to the summit establishing a
more ambitious "fiscal capacity" for the euro zone that could
form the basis for common debt issuance -- an idea seen with
great scepticism in Berlin.
French President Francois Hollande insisted the aim of
closer fiscal integration would still be to bolster growth and
jobs as well to encourage reform.
However he distanced himself from the idea of a large euro
zone standby budget to tackle one-off economic shocks.
"I prefer to talk about a solidarity mechanism," he told a
news conference, adding that leaders had charged EU President
Herman van Rompuy with setting out the details next year.
With officials concerned about complacency creeping into
decision-making now that financial markets have calmed and the
crisis seems less acute, leaders appeared intent on showing that
they are not relaxing.
That said, German elections late next year and France's
reluctance to consider any EU treaty changes needing an awkward
referendum before European Parliament elections in 2014 are
already putting a brake on the pace of decision-making and
limited the summit to verbal commitments rather than decisions.
The two-day summit, the sixth and last of 2012, had been
intended as a detailed discussion on how best to overhaul
economic and monetary union and correct the problems that have
fuelled three years of debt crisis.
The meeting was held just hours after EU finance ministers
achieved a significant breakthrough in negotiations over a
'banking union' by agreeing that the European Central Bank would
be made the chief supervisor of euro zone banks.
That decision, and another by euro zone ministers to release
up to 50 billion euros in new aid to Greece, marked two positive
developments after a long year of crisis-management and took
some of the pressure off leaders to make major strides.
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.
Under the deal, 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.
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 a series of major hurdles remain. The next stages of
banking union - creating a resolution fund for winding up
troubled banks and coordinating deposit guarantees to protect
savers - may be fought over even harder. And then there will be
political and financial obstacles to negotiate through the year.
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
a German election in September casting a long shadow, 2013
promises to be the EU's fourth turbulent year in a row, even
without counting ongoing risks from bailout victims Greece,
Ireland and Portugal.
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.
"What Mario Monti and his government have done in the past
months has contributed strongly to a rise in confidence in
Italy," Merkel said.