European Union leaders capped a third year of debt-crisis management with Greece obtaining fresh financial aid, a euro bank regulator taking shape, and Germany and France sparring over what to do next. German Chancellor Angela Merkel and French President Francois Hollande, stewards of the euro area’s top two economies, promoted conflicting visions of how to revamp economic management once the fiscal crisis subsides. “A split opened between member states that want to put in place a solidarity mechanism for countries affected by external shocks or internal negative developments and those that support national solutions,� Luxembourg Prime Minister Jean-Claude Juncker said early today after the first session of a Brussels summit, the 22nd since Greece’s debt burst onto the agenda in early 2010. “We gradually moved closer together but in the details this was difficult.� Progress in stabilizing Greece and calming bond markets lifted expectations that Europe is going beyond stopgap policy making, often at all-night negotiating sessions, to put a truly failsafe system into place. It took two nocturnes to chart the next steps, starting with an accord by finance ministers at 4:30 a.m. yesterday to make the European Central Bank the hub of bank supervision by March 2014 for the 17 countries using the euro. By noon, a deal was forged to release 49.1 billion euros ($64.3 billion) for Greece, followed by the leaders’ future-of-Europe deliberations until 2 a.m. today. Range Bound The euro traded at $1.3077 at 3:15 a.m. Brussels time, barely changed from $1.2960 at the start of 2012. During the year it never fell below its January 1999 debut rate of $1.1668, a sign that for all the turmoil, investors felt the currency’s survival was never in jeopardy. Financial-market tensions have abated, thanks mainly to a pledge by the ECB, first made in late July and yet to be acted on, to put a floor under the bond markets of vulnerable countries such as Spain or Italy. “It is still possible that an accident will precipitate the collapse of the euro zone,� the Washington-based Brookings Institution said in a report. “What this narrative misses, however, is the other important part of the story -- how European leaders, at the same time as they are battling difficult economic conditions, are slowly building more solid foundations for the euro zone.� Euro Road Map Accords on bank supervision and Greece’s next disbursement left the leaders to focus on a “road map� for turning the euro zone into a “genuine� economic union over the next 5 to 10 years, with models such as the federal systems in the U.S. and Switzerland. With Germany heading for elections in September 2013, Merkel, Europe’s dominant policy maker, ruled out steps that would foist added costs on her taxpayers, the main underwriters of 486 billion euros in rescue loans granted since 2010. A half year of brainstorming over the euro’s future tilted further in Germany’s direction, with any thought of the joint issuance of new debts or redemption of old ones banished from the road map put together by EU President Herman Van Rompuy. A less ambitious proposal for euro countries to pay into a common fund to offset economic shocks was also too much for Germany. A summit declaration emphasized economic discipline, wage restraint and deficit reduction, with virtuous countries qualifying for only “limited� subsidies. ‘External Shocks’ “The question of external shocks and such is not contained in the documents,� Merkel said. “It’s about a limited budget that’s not in the triple-digit billion range, but rather around 10 or 15 or 20 billion euros.� Such a sum would be equal to at most 0.2 percent of euro-area gross domestic product, less than the 2 percent that Bruegel, a Brussels research institute, estimates would be needed for a shock-absorber budget. In the opposite corner was Hollande, who took office in May on an anti-austerity platform and, in a break with the Berlin- Paris tandem that guided the early stages of the crisis response, sought allies in Spain and Italy to offset German dominance. Hollande claimed credit for breakthroughs on crisis handling, saying his rise to power was “one of the elements that enabled us to arrive at this result.� Contractual Pledges Work will continue on a German-led push for countries to make “contractual� pledges to enact economic reforms, such as overhauling the pension system or labor market. France said the pledges should be accompanied by immediate European financing, not the promise of subsidies later. Merkel blocked Hollande’s bid to have “future-oriented investments� bracketed out of budget-deficit calculations. The Berlin-Paris arguments echoed from the early days of the EU, and served as a reminder that the euro was built on the clashes between fiscally stringent Germany and the more welfare- oriented France. German allies in the philosophical debate, such as Prime Minister Mark Rutte of the Netherlands, said any additional discipline should be applied to poorer-performing countries with below-average productivity or trade deficits. “The idea of a separate budget for the euro zone has disappeared behind the horizon -- we like that,� Rutte said. He dismissed the economic-performance contracts as unworkable and revived a proposal to deny EU voting rights to countries that fall afoul of European rules. Next Steps The conflict will carry over into next year’s debate on the path toward a banking union, with the goal of giving central authorities the power, and the financing, to deal with failing banks. At stake is when the 500 billion-euro European Stability Mechanism rescue fund would get the power to recapitalize banks directly, essentially using European money to clean up mistakes made at the national level. The fate of Greece -- pummeled by 17 consecutive quarters of recession and 25.4 percent unemployment -- hangs over the the deliberations. Yesterday’s agreement to release the first aid tranche in six months came with a pledge by European governments to take “additional measures� in case Greek debt reduction veers off track. While another cut in Greece’s bailout-loan rates and an increase in infrastructure funding would help fill in any remaining gaps, the policy makers hinted that outright debt forgiveness -- still a taboo topic for Germany and its top-rated creditor allies -- would be on the table as well. International Monetary Fund Managing Director Christine Lagarde, less constrained by European political sensitivities, was more explicit, saying the euro governments made “assurances to provide additional debt relief if necessary.� To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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