European leaders opened a two-day Brussels summit on Thursday with Angela Merkel, the German chancellor, facing stiff resistance to her plan to force structural reforms on the ailing economies of the eurozone.
The summit was preceded early on Thursday by EU finance ministers agreeing on a compromise on how to rescue weak eurozone banks, or close down rotten ones.
While ministers and senior EU officials hailed the accord as "revolutionary" and "historic", the complicated deal, resisted by Germany, meant there would be no quick leap to a common eurozone system of bailing out bad banks.
Germany had resisted key elements of the bank resolution plans for 18 months, but yielded slightly by agreeing to phase in pooled responsibility for the eurozone over a decade from 2015.
It foiled French-led attempts to have the eurozone's €500bn bailout fund serve as a "fiscal backstop" for winding up or recapitalising bad banks.
"We wanted a backstop," said Pierre Moscovici, the French finance minister. "We are working on its definition, which will evolve over time."
The German finance minister, Wolfgang Schäuble, said: "The final pillar for the banking union has been achieved."
But the deal is likely to run into trouble in the European parliament as well as in some national parliaments.
While Berlin has not been keen to Europeanise authority over eurozone banks, it is keen to entrench a new system of "legally binding contracts'' obliging single-currency member states to implement structural reforms.
The banking shift and the reform contracts, taken together, amount to the biggest moves attempted by the 17 governments of the single currency since the euro and sovereign debt crisis exploded four years ago. But the policies are highly contentious and divisive. "They are trying to solve a German problem," said a senior EU official.
The contracts scheme is Merkel's idea, aimed at making weaker eurozone economies more competitive. It is fiercely resisted even by her northern allies in the euro crisis, such as the Dutch, the Austrians, and the Finns. It is feared by the French and the southern Europeans.
But Berlin is making plain that there will not be progress on banking union unless she makes headway on the contracts.
"Ideologically, there is some kind of connection for the Germans," said a senior EU diplomat involved in the fraught negotiations. Another senior diplomat said Berlin was making the linkage "very explicit".
In a briefing before the summit, a senior German official barely mentioned the new banking regime, while dwelling at length on the need for the binding reform contracts.
Merkel is keen to push the scheme because she believes not enough has yet been done to immunise the eurozone against a new crisis and also to force greater competitiveness on the rest of Europe, not least France, Berlin's biggest worry.
She has already backed down considerably from last year, when the initial idea was to have legally binding contracts forcing changes to pension systems, education systems and labour markets, policed by the EU and with lagging governments at risk of being sued in the European court of justice.
"The initial idea was a German straitjacket. That's dead," said the senior official.
Now the talk is of "partnership" and "national ownership" of the reform contracts which would be greased by "solidarity" payments. But it is not clear how much money is involved, whether it takes the form of loans or grants, or where it comes from (not the EU budget).
The senior German official said the money available would be limited.
"We're interested in making the contracts binding. We think that's right if we want to move beyond the current system based only on recommendations."
The creditors in the eurozone bailouts, the northerners, are against this because they see it as the thin end of the wedge in the creation of a eurozone budget and "transfer union".
And the southerners want the money without being coerced into reforms, particularly in Paris where the president, François Hollande, would struggle with the implicit loss of national sovereignty over economic and fiscal policy.
"It's a Germanic view of how to do structural reform. Everyone else is against it," said one of the senior diplomats. "There's quite a lot tension. It will be a long, bitter and twisted debate."
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