The gathering of European leaders in Brussels is successfully meeting the very low expectations observers had at the onset. As we wrote at the beginning of the week, this summit was not meant to be the forum tasked with making any specific decisions. Instead, it merely sets the stage for the upcoming difficult negotiations on the banking union in the coming weeks. Following comments made by Chancellor Angela Merkel and French President Francois Hollande, many observers see a deepening rift between Paris and Berlin. It is now all too clear that the two governments are pursuing different goals. Germany is trying to delay a decision on the creation of a banking union and wants to focus discussions on additional steps to achieve a closer fiscal union instead. France is doing just the opposite. Just how much daylight there is between Hollande and Merkel depends on how recent developments and proposals are interpreted. As so often is the case, the devil is in the details.

On the banking union, France and other EU member countries expect this to be the main objective between now and December. They argue that ignoring the commitments made at the June summit would amount to a dangerous gamble. If no decision can be made on the banking union within the end of the year, markets would resume their attacks against members of the common currency and financial uncertainty would deepen the economic crisis. Hollande is not the only European leader arguing along those lines. Much to Germany’s dismay, the Frenchman reiterated that he supports Eurobonds. The French President and others also suspect that Merkel’s obsession with her (in fact her Finance Minister) latest plan, which includes the creation of a “super EU commissioner“ empowered with the possibility to veto national budgets, amounts to nothing more than a diversion. In a thinly veiled dig at Merkel, Hollande explained that some member countries who are “very eager to talk about political union are sometimes those most reticent about taking urgent decisions that would make it inevitable.” He has a point.

However, not everything contained in Merkel and Schaeuble’s plan can be reduced to a convenient excuse, one that is solely tasked with kicking the can down the road in order to avoid creating a banking union. It could also be seen as a bargaining tool, linking progress on fiscal integration with progress on the banking union. If seen in this light, there could be an opportunity here to strike a grand bargain before the end of the year. Merkel is conscious of the fact that in 2013, for domestic political reasons, taking bold decisions will increasingly become almost impossible. Furthermore, not everything contained in Merkel’s proposals is impossible to achieve in the short term.

On oversight, most of the elements contained in the German proposal are already in place. Instruments such as the so-called European semester, the six-pack and the recently added fiscal compact are already part of European reality. In fact, Schaeuble and Merkel’s proposal amounts to a major rebranding operation. However, the Germans do add two elements: the need for a super commissioner and a bigger role for the European Parliament. Merkel knows that German voters would support such proposals, because they fit the view that only fiscally irresponsible EU countries would have to fear the commission’s wrath. The proposals reflect a very legalistic approach that is always welcome in Germany. The problem is that bolder steps require treaty changes. And treaty changes are hard to achieve, given the danger of rejection in national parliaments and voters in some member countries.

Of course, Merkel is also still trying to avoid the introduction of any form of Eurobonds. She hoped that the recent steps undertaken by the European Central Bank had put those discussions to rest, at least until the German elections in late 2013. Hollande, however, once again stressed that he supports them, and the latest proposals made by the President of the European Council, Herman van Rompuy, advocate the need to issue common T-bills. Eurobonds, of course, are still unacceptable for Berlin. However, Merkel is also determined to counter the widespread perception that Germany is not willing to show bigger financial solidarity and is still only obsessed with austerity. The German Chancellor is now advocating the creation of a common fund (despite her reluctance to call it such. It would be in effect a common budget) tasked with helping to finance structural reforms in countries in need. Not surprisingly, the money could only be disbursed with conditions attached. It is unclear how much financial firepower this ‘growth fund’ could have. If it were to be raised merely through a financial transaction tax however, the size could end up being very limited.

As we have pointed out repeatedly, merely symbolic gestures will not convince skeptical markets. The German Chancellor can convince her voters with new proposals, but markets and a growing number of European partners will press her for action.

Overall, it is hard to dispel the impression that Merkel is on the defensive. The debate surrounding the banking union is quickly becoming a chance for European partners to call Germany’s bluff: If Merkel really wants more integration she could − and should − start with the banking union. If she really wants to regain the initiative, she has to do more than just throw new ideas on the table. She should mold, not further delay critical decisions.