Last week's summit of EU heads as well as finance ministers marks an important step in completing the eurozone architecture. At the same time, the summit's results fall short of what could have been hoped for.
Start with banking union. When launched on June 29, the project was widely and rightly interpreted by markets to indicate that Europe's leaders had changed their assessment of the euro crisis.
Until then, eurozone heads of state had behaved as if a mere tightening of the existing budgetary provisions could suffice to restore confidence in the euro.
But in June they recognised that the arrest of financial flows within the euro area had deeper roots. Banking union was designed as the first component of a systemic response to a systemic problem.
Together with the announcement by the European Central Bank of a new bond-purchase facility, it was instrumental in convincing markets that the worst was not certain.
The finance ministers now agreed on the first important step towards banking union: the establishment of a single supervisory mechanism (SSM). The compromise they have reached seems to be a good one. The ECB will be in a strong position and responsible for the overall functioning of the SSM. It will have direct oversight of eurozone banks in a differentiated way depending on size.
The size threshold of €30bn means that perhaps 85pc of assets and more than 180 banks in the eurozone will be under direct oversight of the ECB.
The press communique suggests that the ECB will also have the right to scrutinise banks below the threshold, which will reduce banks' incentives to fall below or above the threshold.
This is important to avoid competitive distortions but also to prevent major problems among small banks, which taken together are still large.
Moreover, when financial assistance is given, the ECB will be the supervisor which allows extending the coverage to a number of Spanish Cajas that are smaller in size than €30bn.
The compromise also appropriately allows non-eurozone countries to participate in the SSM.
That first step was, however, the easiest of the three steps towards an integrated financial framework.
Establishing a common resolution framework will be harder, because it implies giving a European authority the power to distribute losses among shareholders and creditors in several countries, close down banks and lay-off employees. Still, heads of state and government made quite some progress on this front.
They explicitly acknowledge that a single resolution mechanism is required and call for the mechanism to be finalised before the European elections in 2014.
They also wish the resolution mechanism to be based on resources from the financial sector itself and there is an acknowledgment that a fiscal backstop is needed.
So which principles should the single resolution mechanism be based upon?
First, given the distributional choices and the fiscal resources needed, the resolution task should be completely distinct from the new supervisor at the ECB as otherwise there will be a temptation of using monetary policy to reduce the fiscal burden.
Second, bank resolution should be exercised by an independent authority. This authority should be guided by clear rules and it should be politically accountable ex-post.
However, the actual decisions should be done at arm's length from the fiscal authorities to avoid excessive politicisations of decisions.
Third, the authority should rely on an appropriate fiscal backstop. A clear decision-making framework is needed to determine under which conditions aid can be requested.
Defining those conditions will be controversial, because budgetary decisions are always the most acrimonious.
Furthermore, agreeing on banking regulation that proves appropriate for reducing fiscal costs will also be controversial.
The next steps to be taken for the completion of banking union are therefore clearly on the table but far from easy to achieve.
As regards fiscal union, the summit is a disappointment. The founding fathers of the euro were aware of the need to complement monetary with fiscal union but put off difficult choices to future decision makers.
The time has come to address a series of unanswered questions. Should there be a proper euro-area budget?
Should a new system be conceived as an intergovernmental transfer scheme? Or should sovereigns' ability to borrow be restored through some form of mutual guarantee?
What should be the degree and type of conditionality? What does a euro area fiscal union mean for the EU as a whole?
It was evidently too early to take any decision now, yet a reflection process should have been initiated.
Hermann Van Rompuy, the president of the European Council, was willing to conduct it.
By giving him a mandate, the European leaders would have shown that they are able to think strategically, not only to respond to market pressure.
Guntram B Wolff and Jean Pisani-Ferry are directors of the Bruegal economic think tank in Brussels.