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Investors cheered. Finally, the eurozone was going to break a "vicious circle" that had proved fatal for Ireland and now was threatening Spain: that of failing banks damaging the finances of governments whose own weakness in turn eroded confidence in national banks. What was less clear from the leaders' statement was exactly what they meant by "effective". It is now evident that agreement over what's required of an effective supervisor could take some time.
For the European Commission, the European Union's executive arm that the leaders charged with drafting the proposal, the precondition for allowing the European Stability Mechanism to recapitalise banks directly would be met once the ECB starts policing already bailed-out banks—ideally on January 1, 2013.
It didn't take long for German Finance Minister Wolfgang Schäuble to communicate that he had a different understanding. "I don't see that one can have direct recapitalisation of banks from the European Stability Mechanism already from January 1", he said at a meeting with his eurozone counterparts in Cyprus at the weekend. Building up the personnel and expertise to supervise the eurozone's banks "effectively" would take time, he warned.
It is inconceivable that the ECB could "effectively" supervise small local banks like Germany's savings banks, known as Sparkassen, and it should instead focus on large "systemic" institutions, Mr Schäuble has said repeatedly. The German objection to opening up local banks' books to the ECB appears in part driven by concern about what happens next. With a bank supervisor in place, completing the eurozone "banking union" will require establishing a regional fund to provide deposit guarantees and for financing the "resolution" of failing institutions. According to the German savings banks association, these plans are really about raiding Germany's financial safety nets to bail out shaky foreign banks.
With that, the Sparkassen association pointed out a significant flaw in the June summit plan. It is difficult to see how a central supervisor can decide to withdraw a bank's licence to operate if it doesn't know what will happen and who will pay after it makes that call.
The ECB seems to agree. "You need all three elements [common supervision, a resolution regime and better-coordinated deposit-insurance funds]", Jörg Asmussen, a member of the ECB's executive board, said on Friday, after discussing the supervisor proposal with finance ministers. "If the latter two are missing, supervision cannot be effectively exercised."
At the moment, there are no Europe-wide resolution or deposit-insurance funds to pay for any problems a common supervisor may detect. That's a sharp contrast with the US, where the Federal Deposit Insurance Corporation guarantees the contents of most savers' bank accounts and oversees and finances bank resolutions.
Just two weeks before the June summit, the Commission proposed a new law that would force all states to build up national resolution funds and, crucially, set up a system to impose losses on creditors when a bank runs into trouble. But that plan falls far short of a "banking union", and the timing is off.