Discord simmers ahead of EU summit

At the time eurozone leaders concluded that when an "effective single supervisory mechanism" is established, the permanent eurozone bailout fund (ESM) could then recapitalise banks directly.

Spain, looking to keep bank debts off its state books, was euphoric. Ireland, which won specific wording on improving the sustainability of its debt, was too. They and others assumed a quick deal on a banking supervisor was imminent.

Germany, Finland and the Netherlands then put on the brakes.

They made it clear they think the ESM should only finance bank bailouts once the supervisory mechanism is set up and that it should not salvage old debt.

Both sides claim the other is misinterpreting the text. Ahead of the summit there has been much grumbling.

In a combative summit-eve interview with five European newspapers, French President Francois Hollande said Berlin should stop blocking what it agreed in June and that a banking union should be ready by the end of the year. Irish Prime Minister Enda Kenny at a meeting in Bucharest Thursday said much the same.

But Germany is not backing down.

"Effective and established," these are the key words, said one German government source on Wednesday.

"Read the text from June again. It does not say anywhere that the Council has to agree something by the end of the year. Even less so does it say that on the first of January 2013 a new system will be in place and be effective."

It is up to those interpreting the text to explain why they have such "illusions," added the official.

Stabilising the eurozone

Meanwhile, formally on the table is a discussion on what steps need to be taken to "stabilise" the eurozone. Decisions are to be taken only in December.

To focus minds, there is a paper written by EU Council President Herman Van Rompuy containing rudimentary ideas for a eurozone budget line, a treasury, increased EU-level centralisation of budgetary and economic governance powers and a debt redemption fund.

It is a direct response to a German push for fiscal union.

But the paper, written after consultation with all member states, reflects deep division between Paris and Berlin.

The two countries are the counterpoints in the discussion on how much fiscal discipline can be demanded from a member state before it is shown some fiscal solidarity. Germany wants more of the former and less of the latter.

One issue in the Van Rompuy paper highlights the differences between the two camps - the idea for a fiscal capacity for the eurozone.

To German eyes, this should be a limited pot of money, perhaps financed by a financial transactions tax, which would be used as "incentive" for countries to undertake structural reforms.

The French and other southern states, who would like to call it a eurozone budget, interpret the idea much more expansively.

Highlighting the tensions, Hollande called on German Chancellor Angela Merkel to "put Europe's interests first" rather than being so conscious of the domestic scene.

He also directly challenged Merkel's refusal to countenance eurobonds - the mutualisation of eurozone debt - saying: "I know the sensitivity of our German friends to the problem of supervision. Whoever pays should control, whoever pays should sanction. I agree. But budgetary union should be completed by a partial mutualisation of debts through eurobonds."

Forming the backdrop to the summit, but not on the actual agenda, are Greece - desperately waiting for a further tranche of bailout money - and Spain, on the brink of asking for a bailout.

Also at the back of everyone's mind is how to manage a union of 27 states, where 10 are not members of the single currency.

Again France and Germany differ. "We want an open construction," says Berlin of any future deeper political integration. France is less so inclined.