BRUSSELS European governments reached a landmark deal on Thursday that gives the European Central Bank new powers to supervise banks, boosting confidence in the single currency bloc as it enters the fourth year of its debt crisis.
EU finance ministers forged a deal on the single supervisor after marathon overnight talks and leaders were set to give their stamp of approval at a summit later in the day.
At their sixth and final gathering of 2012, they will discuss closer fiscal ties for their troubled currency union, a drive that some officials worry has lost momentum since ECB President Mario Draghi calmed markets this summer by pledging to do "whatever it takes" to save the euro.
"We need to keep the momentum, keep the determination, keep the focus, and that is going to be my message to leaders this evening," said European Commission President Jose Manuel Barroso.
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.
In addition to getting agreement on the first stage of a "banking union", a bold step towards pooling sovereignty, finance ministers also approved the release of nearly 50 billion euros in fresh aid for Greece, averting a catastrophic default and the risk of a so-called "Grexit".
ECB President Mario Draghi hailed the deal on banking supervision as an "important step" towards a stable economic and monetary union.
Chancellor Angela Merkel, speaking on her way into the summit in Brussels, also praised the agreement, saying it would boost trust and confidence in the euro zone.
Olli Rehn, the EU commissioner for economic and monetary affairs, said "Cassandras" who had predicted disaster for the euro had been proven wrong.
But there is no 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.
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 even considering risks from bailout victims Greece, Ireland or Portugal.
The immediate priority is to finalise the legal framework for banking union and get the backing of the European Parliament. 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, mostly major cross-border lenders and state aided institutions, with the power to delve into all 6,000 banks in case of problems.
"It's very good news that shows that step-by-step the euro zone and the European Union are coming out of the crisis," French Finance Minister Pierre Moscovici told reporters.
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 hope is that it will go some way towards severing 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.
Euro zone in graphics r.reuters.com/hyb65p
European bank stress graphics link.reuters.com/rer25s
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.
European Council President Herman Van Rompuy and the heads of the European Commission, ECB and Eurogroup have put forward a blueprint for closer euro zone fiscal, economic and political integration alongside the banking union.
But Merkel has lowered expectations for progress on that agenda at the summit, telling lawmakers that EU leaders should focus instead on steps that can be achieved within six months, notably to improve economic competitiveness.
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.
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.
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.
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. (Additional reporting by Madeline Chambers in Berlin and Gilbert Kreijer in The Hague; Writing by Luke Baker and Noah Barkin)