(CN) - EU lawmakers will hand the European Central Bank sweeping supervisory powers to bolster a new stability mechanism in the wake of the deepening debt crisis.
The Council of the European Union said it handed the agreement to its president, who will negotiate with the European Parliament to adopt the legislation by Jan. 1.
Finance ministers across Europe asked for a "single supervisory mechanism," or SSM, to streamline the new European Stability Mechanism (ESM), a one-stop shop to mobilize and dispense funding to struggling EU countries.
The ESM is designed to safeguard the euro and member states within the euro zone with a lending capacity of up to $850 billion.
An en banc Court of Justice upheld the ESM against constitutional challenges last month, allowing the treaty establishing it to take effect Jan. 1 as planned.
Lawmakers said approval of the SSM is essential to the ESM, which currently recapitalizes failing national banks via member state treasuries. The new plan would allow the ESM to give money directly to the banks, enabling "the vicious circle between banks and sovereigns - which has been a salient feature of the debt crisis in Europe - to be broken," the council said.
The SSM will be composed of the European Central Bank and national finance authorities, with the bank in charge. It will have direct oversight of eurozone banks. Member states outside of the EU can also participate in the SSM if they choose, the council said.
Monetary tasks of the European Central Bank will remain strictly separated from the new supervisory role to "eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision," lawmakers say. To accomplish that, the bank will set up a supervisory board made up of representatives from eurozone countries and non-eurozone participants.
National authorities will remain in charge of consumer protection, money laundering, payment services and oversight of international banks. The European Banking Authority will continue its oversight of the single EU market, though voting structure changes will ensure that countries participating in the SSM do not dominate the board, the council said.
The council also announced plans to strengthen its Economic and Monetary Union (EMU), a group of policies aimed at converging the economies of all EU member states. The move is essential to the success of the SSM, lawmakers said.
The EMU plan would coordinate national reforms, requiring member states to notify EU institutions before undertaking major economic policy reforms, and allow member states to enter into contracts with each other and EU institutions to promote economic growth.
"Throughout the process, the general objective remains to ensure democratic legitimacy and accountability at the level at which decisions are taken and implemented," the council said in a statement. "Any new steps towards strengthening economic governance will need to be accompanied by further steps towards stronger legitimacy and accountability."
The council continued: "At national level, moves towards further integration of the fiscal and economic policy frameworks would require that member states ensure the appropriate involvement of their parliaments. Further integration of policy making and greater pooling of competences must be accompanied by a commensurate involvement of the European Parliament. New mechanisms increasing the level of cooperation between national parliaments and the European Parliament ... can contribute to this process. The European Parliament and national parliaments will determine together the organization and promotion of a conference of their representatives to discuss EMU related issues."
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