Eurozone leaders held a summit last week that was important, but not for the reasons you might think. What has been decided will change the future of Europe. The banking union is a tool so powerful that it could unite the core of the EU. But it will also separate it from the rest. It is more useful to think of the banking union as a long-term political project than as a tool of crisis resolution. Depending on your view, it can be monumental or irrelevant.

The decision taken at the summit was to agree a firm timetable for the set-up and the legal foundations of a single supervisory mechanism – a new eurozone bank regulator within the European Central Bank. It will be the first of several steps towards a full banking union – a process that will take many years to complete. The SSM will ultimately encompass all 6,000 eurozone banks. It may not supervise each directly but it can seize control when it wants to. The set-up of the SSM will be followed by a common bank recapitalisation policy and fund, a single resolution mechanism and, ultimately, a single deposit insurance scheme. The economic functions of resolution, recapitalisation and deposit insurance can be pooled in different ways, in different institutions. The final shape is as yet uncertain. But it is going to happen.

Angela Merkel, German chancellor, was right when she said you could not have the SSM up and running by January 2013. A complete banking union is hugely complex and takes time. Important aspects of the project will require a change in the European treaties. Britain and others with no ambitions to join the eurozone will not sign up. It would be wrong to think of banking union as an extension of the single market. It is best to think of it as part of the hard-wiring of a monetary union.