European Central Bank Executive Board member Benoit Coeure said policy makers will early next year start building a banking union that will be a "game changer" for the euro area.

"The establishment of a banking union is a key factor in the completion of monetary union, and probably a turning point in the current crisis, with profound repercussions for the financial sector and the real economy alike," Coeure said in a speech in Frankfurt today. "We are confident that implementation will start as planned with the establishment of" a single supervisory mechanism "in early 2013," he said.

Euro-area governments agreed in June to establish a banking union and asked the ECB to assume the role of a single bank supervisor. Coeure said that in addition to centralized supervision, the banking union should have a common resolution structure and shared deposit insurance.

"These three elements, when operational, would effectively sever the link between banks and sovereigns," he said. "Banks' funding costs should start to indicate again their individual creditworthiness, without the premia that reflect their sovereign's fiscal position or redenomination risk."

While setting up a fully-fledged banking union will take some time, Coeure said the supervision mechanism should enter into force "as early as possible in 2013" and proposals for a resolution structure will also be needed next year.

David Fuller's view Fullermoney has long maintained that banking union was essential for the euro to survive. The initial announcement in June was the major catalyst in the subsequent global stock market rally, in my opinion. The longer-term challenges of debt reduction and GDP growth generation remain but at least they can be addressed now that Europe is putting in place the necessary foundation for a viable currency union.