Banking union: the new battleground for Europe

As European financial crisis enters a critical stage, should the ECB have the power to supervise all euro zone banks as well as those in non-euro zone countries that choose to become part of a single mechanism or shall it focus on monitoring only the big, systemic banks instead? European commissioner for economic and monetary affairs Olli Rehn believes in the first approach; German Finance Minister Wolfgang Schaeuble has rejected it.  Autumn’s debate is going to be fierce in Brussels.

This move would be the first towards a banking union, awaited by many. The euro zone could directly recapitalise banks and break the vicious circle between indebted governments and their banking sectors. And it would leave most German banks outside the net. Critics in Brussels say Berlin wants to maintain local supervision of its network of state-owned Landesbanks.

“Our approach envisages an ambitious mechanism with a relatively broad coverage, which will oversee all banks in the euro area, with the ECB at the heart of the system,” Rehn said in a speech to a European Parliament committee on Monday.

“The ECB has itself said it does not have the potential to supervise the European Union”s 6,000 banks in the foreseeable future,” Schaeuble told German radio on the same day.

Banks are reacting. Smaller German savings and cooperative ones have also voiced “great concern and irritation” at the EU commission’s plans, saying they should not fall under the umbrella of a European supervisor, and instead remain regulated on a national level. Deutsche Bank co-chief executive Juergen Fitschen, said on Tuesday Germany should support the idea of a common banking union.

“The elements make sense if you think about Europe as a common market,” Fitschen told a banking conference in Frankfurt on Tuesday.

The ECB plans are set to be announced on September 12 by Commission President José Manuel Barroso. However, a banking union will be a long process that could take years to complete. The euro zone will have to agree on a way to guarantee bank deposits in the single currency area and on who will pay for the resolution of failed banks supervised by the ECB.