First gathering in almost four months indicates how much euro zone crisis has changed

Taoiseach Enda Kenny travels to Brussels today for the first summit of EU leaders since June. The fact that today’s meeting constitutes the first official gathering of European leaders in almost four months indicates how much the euro zone crisis has changed, as the threat of an imminent euro zone break-up has receded and positive GDP figures suggest glimmers of recovery.

Nonetheless, a series of events in recent weeks have propelled a number of issues to the fore. On Tuesday, Italian prime minister Enrico Letta pledged to put EU migrancy on the agenda following the recent Italian boat tragedies which have claimed the lives of up to 550 people. Mr Letta is expected to call for an urgent appraisal of Europe's asylum policies and a concerted effort by Europe to deal with a deepening problem that Mediterranean countries feel they are fighting on their own.

With governments reluctant to extend asylum protection amid growing anti-immigrant feeling in Europe – reflected by the rise of far-right parties – a strengthened European response will be difficult to formulate even as unrest in neighbouring Syria and Libya threatens to exacerbate Europe’s migrancy difficulties.

The other main topic up for discussion is the banking union. Sixteen months after EU leaders pledged to break the link between banking and sovereign debt through the creation of a banking union for Europe, there are real concerns that the project is losing momentum. A meeting of finance ministers last week failed to generate concrete proposals, while it is widely believed that no decisions will be made until a new German government is in place.

Banking union
Europe is under pressure to reach agreement on the next stage of a banking union – which deals with how troubled banks should be resolved and rescued – before Christmas in order to ensure that the obligatory scrutiny by the European Parliament is completed before European elections next year.

Analysts have repeatedly pointed out that a more integrated banking system is vital for the health and credibility of the banking sector and the euro-wide economy.

The announcement by the ECB yesterday of how it intends to proceed with its assessments of euro zone banks next year has given added urgency to the issue. Yesterday’s announcement is a milestone in euro zone economic policy as a central bank prepares to take supervisory responsibility of the euro zone’s 6,000 banks, including direct supervisory control of the 128 most systemically-important institutions.

However, the relatively swift progress in implementing the so-called first pillar of banking union – the Single Supervisory Mechanism – serves to highlight the delays that have beset the subsequent phases. These include a resolution and recovery directive and a deposit guarantee scheme, both of which deal with the tricky issue of who should pay for future bank wind-downs.

The chaos surrounding the Cypriot bailout this year showed the need for a common European approach when banks run into difficulty.

Further, the ECB has consistently called for "backstops" in case its stress tests reveal capital shortfalls, a point underlined by ECB president Mario Draghi yesterday.

Over the past few months, European finance ministers have been discussing the “creditor hierarchy” that would come into play if a bank needs capital. Current state aid rules stipulate that banks should look to private sources in the first instance, followed by junior bondholders and shareholders. The State would then be requested to step in. Only if it is deemed to be unable to do so would the euro zone’s fund, the ESM, be permitted to directly recapitalise banks.

Yesterday Germany suggested that senior bondholders could also be bailed-in – a move that some fear could destabilise markets, but also a further sign of Germany’s staunch preference for using the taxpayer ESM fund only as the last possible resort.

The sharp fall in bank shares yesterday following the ECB announcement suggests apprehension about the level of capital shortfalls that could lurk in euro zone banks. This month the IMF estimated Spanish, Italian and Portuguese banks face about €250 billion in potential losses on their commercial loans over the next two years.