The European Council met on 18 October to discuss several aspects of a possible banking union. European leaders agreed that in order to break the vicious circle between banks and sovereigns, the urgent element needed is a Single Supervisory Mechanism, to prevent banking risks and cross-border contagion from emerging.

The European Council celebrated a meeting on 18 October in order to discuss several aspects of the banking union. They revised some aspects of the possible banking union with the objective of agreeing on the legislative framework by 1 January 2013. European leaders agreed that the urgent element now is setting up a Single Supervisory Mechanism (SSM), to prevent banking risks and cross-border contagion from emerging. The European Commission proposed a banking union with stronger supervisory powers for the European Central Bank in September 2012.

The SSM is a first, essential step toward a complete integrated framework for the financial sector, according to President Herman Van Rompuy. Other steps also need to be taken quickly, starting with harmonising national resolution and deposit guarantee schemes. As agreed in June, direct recapitalisation by the European Stability Mechanism will be possible once an effective SSM has been established. The European Council also stressed that for a stable Economic and Monetary Union, the EU also needs stronger integrated frameworks for budgetary matters and economic policies.

With regard to Greece, euro area leaders sent a message to this country. They expect Greece continues budgetary and structural policy reforms and they encourage its efforts to ensure swift implementation of the programme. This is necessary in order to bring about a more competitive private sector, private investment and an effective public sector. According to the Eurogroup, these conditions will allow Greece to achieve renewed growth and will ensure its future in the euro area.