German Chancellor Angela Merkel said on Friday that a single banking supervisory body will be set up in the course of next year, opening the way for the eurozone's rescue fund to inject capital directly into the region's ailing banks.

The announcement effective ends the political deadlock that had threatened to slowdown the European Union's push for closer economic integration.

According to a document released by the European Council, a legislative framework will be put in place by the 1^st of January, while "work on the operational implementation will take place in the course of 2013."

The European Council added:

In this respect, fully respecting the integrity of the Single Market is crucial.

As part of the Franco-German compromise, all 6,000 banks in the 17 euro countries will come under the supervision of one European body led by the European Central Bank.  

"At the moment, money to help put banks has to go through a country's government - placing more strain on state finances," explained the AFP.

" In Ireland's case, the government's attempts to rescue failing banks forced it into a bailout. Some fear Spain could face that fate, too," the AFP added.

The announcement appears to be a compromise between Germany - often referred to as Europe's paymaster - and France, who had earlier differed over the timeline and scope of the banking union.

Germany, in particular, had been reluctant to allow the use of taxpayer money to finance the bailout of ailing eurozone banks and instead called for national budget discipline as the first priority.

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Responding to criticism of myopia and accusations of dragging its feet when it comes to arresting the crisis, Merkel said:

We need an efficient supervisor because otherwise the markets won't take us seriously.

Despite the lack of a formal conclusion, French President Francois Hollande declared that "the worst is over" and claimed the banking union could be up and running "within weeks or months of January 1."

""We are on track to solve the problems that for too long have been paralysing the eurozone and made it vulnerable," he said at a 3 a.m. conference.

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