\'Euro Fudge\' or Historic Compromise? In Duel, Both Merkel and Hollande Score

LONDON - Chancellor Angela Merkel and President François Hollande fought to a draw, Germany's Die Welt newspaper said in its report of a summit duel between the two European heavyweights that ended in an overnight compromise on banking supervision.

The sporting imagery hit the mark after the ringside body language of the German and French leaders heralded a bruising bout in Brussels over the latest move to solve the euro crisis.

Long gone were the days, according to the prestigious German daily, when German and French leaders would cook up a deal in advance and hand it to their partners for rubber-stamping.

As my colleagues James Kanter and Stephen Castle report from the Belgian capital, European leaders agreed to early legislation that would allow bailout funds to go directly to ailing euro zone banks. Point to Mr. Hollande.

But they left open a decision on a precise timetable for implementing the new regime, which involves turning over supervisio n of the currency union's 6,000 banks to the supra-national European Central Bank. Point to Ms. Merkel.

In principle, full implementation of the new supervisory framework would allow funds from the euro zone's "500 billion European Stability Mechanism, its permanent bailout fund, to be pumped directly into ailing banks without the debt being added to member-states' balance sheets.

So, why the Franco-German clash and why the compromise? As is so often the case at these top-level European tourneys: It's the politics, stupid.

Both the German and French leaders want to take home at least a draw on points from the two-day summit ending Friday.

Mr. Hollande, whose recent opinion poll ratings have plummeted, arrived in Brussels talking up the prospects of progress in resolving the euro crisis. “We are near, very near, to an end to the euro zone crisis,” he said in a pre-summit interview with European newspapers.

One poll this week suggested two thi rds of French voters believe the European Union is headed in the wrong direction, a sobering statistic for their Europhile president as he watches his popularity head into negative territory.

In a swipe at Ms. Merkel's own political concerns, Mr. Hollande told his interviewers that domestic electoral considerations should not get in the way of solving the euro crisis.

Ms. Merkel was very sensitive to questions of internal politics and to the demands of her Parliament, he said. “I understand that, and can respect that,” he said. “But we all have our own public opinion. Our common responsibility is to put Europe's interests first.”

With Ms. Merkel's former finance minister, Peer Steinbrück, breathing down her neck ahead of Parliamentary elections next autumn, Ms. Merkel is under pressure to retain her reputation as a staunch defender of German interests.

As my colleague Melissa Eddy reported from Berlin, Mr. Steinbrück accused the Chancellor o f driving a wedge between Germany and its European partners through duplicitous handling of the euro zone crisis.

She had allowed members of her center-right coalition to publicly bully Greece and had failed to convince Germans of the benefits of euro membership, Mr. Steinbrück told Parliament.

The compromise deal that puts off implementation of the new banking supervision regime therefore comes as at least a partial victory for Ms. Merkel.

As James and Stephen note, by leaving the start date vague, Germany has an opportunity to delay any use of the new bailout fund to directly recapitalize Spanish banks until after the elections in September.

Voters would likely punish any policymaker seen as obliging German taxpayers to foot the bill for the perceived profligacy of their European partners.

The middle-of-the-night deal gave both the French and German leaders breathing room, although some commentators viewed the compromise as a classic euro-fud ge.

Britain's Euroskeptic Daily Telegraph enthusiastically quoted an AP wire report that concluded:

“Though the leaders said their decision represented a step forward in the ambition of forging a banking union, many observers are struggling to figure out exactly what has been achieved.”