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European leaders have taken a big step forward in their efforts to address the continent's debt problems. At a meeting today in Brussels, they approved the idea of a single regulator who would have power over most of Europe's banks. Officials say such a regulator could have averted the kind of credit bust that has crippled the economies of Spain, Greece and Ireland.
NPR's Jim Zarroli has that story.
JIM ZARROLI, BYLINE: The debate over what to do about Europe's banks has been an especially long and difficult one. And the meeting in Brussels dragged on for 14 hours before (unintelligible), who holds the rotating presidency of the European Union, could announce an agreement.
UNIDENTIFIED MAN: I guess it's a Christmas present for us. But it's also a Christmas present for the whole of Europe, a step forward, a step in the right direction.
ZARROLI: A lot of details have to be worked out. But the agreement will set up a single regulatory body - much like the Federal Reserve in the United States - that will hold sway over the medium and large banks in the countries that use the euro. The regulator will also have the authority to intervene when small banks get into trouble.
Nicolas Veron is a visiting fellow at the Peterson Institute for International Economics.
NICOLAS VERON: This is a very significant deal. This is not one of those usual European surges. This is a transformation of the landscape.
ZARROLI: Veron says one of the big reasons why countries such as Spain and Ireland got into so much trouble was that their banks did a lot of reckless lending. Spain in particular fell victim to an enormous real estate bubble, and when it popped banks were left with mountains of bad debt, and that undermined confidence in banks all over the continent.
Veron says the European financial sector is big enough overall that it should have come to the rescue of these troubled banks and recapitalized them. But under Europe's Balkanized regulatory system, banks and small countries like Ireland more or less had to fend for themselves. Veron says the plan adopted last night should change that.
VERON: Now finally, European leaders have accepted that they needed to be serious about a more centralized system of supervision, if they wanted to get a handle on this.
ZARROLI: But European countries will pay a price for the new system. The new regulator will have the authority to set capital requirements for banks. That means it will have the power to decide how much the banks can lend and how much they have to keep in reserve.
Economist Simon Johnson, of MIT, says this has been an especially contentious issue in Europe. Officials in each country have wielded considerable power over their own banks and have sometimes been accused of using it for political purposes. Johnson says the new regulator will inevitably mean a loss of sovereignty for the countries.
SIMON JOHNSON: The politicians are going to have to back away from the banks in Europe to a degree that they haven't done for 100 years. So this is going to be big if they can actually implement it.
ZARROLI: But as the debt crisis has dragged on, European leaders have slowly come to accept the fact that the banking system has to change.
One big question still on the table is what will happen to European countries that don't use the euro. Sweden and the United Kingdom, among others, have said they won't be part of the new regulatory body. England has some of the largest and most powerful banks in the world, but after today's agreement they'll increasingly find themselves playing by a different set of financial regulations and isolated from the rest of Europe.
Jim Zarroli, NPR News. Transcript provided by NPR, Copyright National Public Radio.