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Euro zone leadership clash over the creation of unified banking system

May 14, 2013

At a meeting of euro zone finance ministers in Brussels in May French and Portuguese officials called for the formation of a banking union among member states. Such a union, which would entail supervision of large banking institutions by the European Central Bank (ECB) and the creation of a single authority to unwind failing banks, has been widely favored among European Union (EU) nations and institutions since it was initially proposed in June 2012

Germany, the EU's largest and most prosperous economy, however, has urged caution in the greater bank integration and noted several legal objections to immediate adoption of reforms. 

Necessary for investor confidence
"Banking union is the credibility test of the European Union," Spanish Prime Minister Mariano Rajoy, told the Chicago Tribune. 

The wide support for the banking union stems from the perception that it would help euro zone nations respond more productively to economic crisis in the future. It is also believed that it would bolster investor confidence in European markets that have struggled with recession in early 2013.  

ECB supervision is scheduled to go into effect in 2014, and so far it appears to be on track. A single regulatory authority to help break-up failing banks, on the other hand, has generated more controversy. German Finance Minister Wolfgang Schaeuble has pointed out that to create a new entity to monitor banks existent treaties will need to be modified. Rather than pushing ahead with questionably legally grounded reform, he suggested a two-tier process during which national institutions head-up wind down processes while the legal framework and funding for a single European authority is constructed.

The suggestions have garnered some hostility among other euro zone ministers. 

"You do not need treaty change for banking resolution, it can be done under the existing rules," one EU diplomat said, according to the Tribune. "Germany is erecting barriers to slow down the process, but that is a political decision, not a technical one."

German concerns
A change to the EU treaty can take years and runs the risk of be
ing rejected by one of its 27 signatories. According to the news source, Germany's call for treaty change may be a delaying tactic to forestall the discussion of banking union until after German parliamentary elections in fall 2013. Chancellor Angela Merkel already faced rising discontent in September over bail outs of euro zone banks and governments.

There is  some concession among EU officials that Germany's concerns are not wrong, they are perhaps just overstated.

Those interested in European banking can pick up a calling card and stating talking finance with an international audience. 

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