[loginereQQ]

(Reuters) - European leaders will discuss specific steps towards a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund at a summit on June 28-29, according to a document prepared for the meeting.

Two officials familiar with the 10-15 page document, drawn up over the past month and which is still being revised ahead of the summit, said it sets out in detail the four "pillars" required for a strong economic and monetary union which leaders believe is necessary to secure the currency project's future.

As well as progress towards a banking union, the paper discusses the need for a more integrated budget policy, steps required for deeper economic integration, and how to retain "democratic legitimacy" if countries give up some sovereignty.

The document has been drafted by European Commission President Jose Manuel Barroso, European Council President Herman Van Rompuy, European Central Bank chief Mario Draghi, and Jean-Claude Juncker, head of the Eurogroup countries using the euro.

European leaders have already said the first area they need to work on is a banking integration as they try to break the link between bad banks and indebted governments, with the worsening situation in Spain an immediate concern.

EU officials believe that could be achieved in a year, although Berlin wants to see much more progress towards fiscal integration first, something that would require much longer due to the need to change the European Union treaty to achieve it.

The document goes into most detail on the banking proposals, setting out the need for a single European banking supervisor, a common EU deposit-guarantee scheme and a single bank-resolution fund to wind down the region's bad banks, the officials said.

The paper sets out options under each heading, saying that when it comes to a single banking supervisor it could either be charged with overseeing all EU banks, or else look after the major systemic banks with cross-border operations, while another body looks after broader, day-to-day oversight.

The expectation is the ECB will eventually be given sole responsibility for overseeing Europe's biggest banks, while the European Banking Authority watchdog retains a broader oversight role along with coordinating the work of national regulators.

On a common deposit insurance mechanism, the paper suggests that there needs to be a strengthening of and closer integration among national guarantee schemes to provide a more reassuring backstop across the whole European Union.

On a resolution fund to deal with failing banks, it calls for a single mechanism "with a large envelope" that would be financed via levies on the banking sector, such as a financial transaction tax, and would offer "an integrated EU solution for resolution".

The document, which draws heavily on proposals made by the European Commission on June 6, says an "immediate and permanent mutualisation" of risk may be required to backstop the banking sector. It suggests the euro zone's permanent ESM bailout fund could be used to recapitalize banks directly, rather than having to lend to governments for on-lending to banks.

All of those proposals would be possible under existing EU treaties and could be implemented relatively rapidly, the document indicates.

Even if it took only a year, this will probably not come quick enough to ease market pressure on Spain and Italy that is now reaching danger levels, although some analysts believe a strong signal of intent could help. That could also persuade the ECB to step in.

"Short term, there is clearly a risk that the summit will disappoint markets yet again. If that were to be the case, I have no doubt that the ECB will step in," said Erik Neilsen, global chief economist at Unicredit.

That could take the form of an interest rate cut, further easing of collateral rules for Spanish banks so they can continue to access ECB funds or even a resumption of the bank's bond-buying program, which several of its policymakers oppose, he said.

BUDGET INTEGRATION

In a second section examining the steps required for closer fiscal coordination, the document says there is a need to go beyond existing legislative proposals such as the fiscal treaty, which 25 of the EU's 27 countries have signed up to and which commits them to a balanced budget.

The paper says that as closer banking and fiscal integration is achieved, the issue of mutualisation of debt will become more immediate and it raises the option of a debt redemption fund along the lines of that proposed by Germany's "wise men".

That is an idea that France, Italy and others have pushed hard for but which German Chancellor Angela Merkel opposes.

Merkel has not ruled out a sharing of debt per se, but has said any discussion on it can only happen at the end of a long process of integration that is likely to take many years. In contrast, France will find it difficult to stomach the loss of sovereignty that fiscal union would demand.

"The political leaders are now trying to move to a degree of fiscal and political union within a very short period of time. In democracies, such changes usually take a few years, and whether enough can be achieved in time remains to be seen," Neilsen said.

"However, in my mind, this does not imply an imminent risk of a breakdown of the euro zone ... It's a political project, and political leaders are unlikely to throw in the towel because markets don't like the policies."

Other sections of the document discuss the broader aims of greater EU labor mobility, efforts to improve pan-EU competitiveness, and to examine common taxation such as a common corporate tax base and a financial transactions levy.

There is likely to be heated discussion on issues such as debt mutualisation and any pooling of liability under a banking union, with Germany adamant that it will not be put on the line to underwrite the liabilities of other euro zone countries.

No decisions are expected at the summit, but if leaders agree that there are grounds to push ahead, Barroso, Van Rompuy and the others will be given a further mandate to develop the ideas in greater detail, including more specific timelines.

Van Rompuy has said he hopes to have a more thorough set of plans drawn up by the next EU leaders' summit in October or possibly the one after in December.

(Writing by Luke Baker; Editing by Ralph Gowling)

http://www.reuters.com/article/2012/...85O07G20120625

[loginereQQ]

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/ccb2fda0-b...#ixzz1yvc1K1OV


All 27 EU countries should submit their big banks to a single cross-border supervisor as part of a banking union to be enacted as soon as next year, the president of the European Commission has urged.

In an interview with the Financial Times, José Manuel Barroso said the EU needed to go beyond the incremental legislative measures proposed by his institution last week and take “a very big step” towards deeper integration if the bloc is to learn the lessons of the sovereign debt crisis.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/ccb2fda0-b...#ixzz1yvc63qlF


The plan, which would also include an EU-wide deposit guarantee scheme and a rescue fund paid for by levies on financial institutions, could be achieved by next year and without changes in the bloc’s existing treaties, Mr Barroso said.

“I think now we have conditions to go further that, frankly, we did not have before,” he said. “There is now a much clearer awareness among European member states about the need to go further in terms of integration, especially in the euro area. This is one of the lessons of the crisis.”

However, George Osborne, the UK chancellor, insists Britain will not be part of any banking union that makes its taxpayers liable for recapitalising eurozone banks or puts major British banks under the watch of an EU supervisor.

Mr Barroso’s proposal to put such a supervisor in place would give one EU authority power to wind down a bank and impose losses on bondholders without the approval of national authorities.

He also wants to accelerate action on existing proposals for the deposit guarantee scheme and bank resolution, which are primarily handled at a national level.

Mr Barroso’s suggestion that such integration could be achieved without treaty changes is also likely to raise objections in Berlin, which has insisted such measures can only come with a legal overhaul.

Despite those hurdles, Mr Barroso said he believed there is now greater appreciation in both London and Berlin about the need for an EU-wide banking regime, arguing there was significant political impetus for such changes.

“The European project has always made progress step-by-step,” he said, adopting the language frequently used by Angela Merkel, the German chancellor, to denote her objections to sweeping reforms. “We should continue step-by-step, but now we need a very big step. Either Europe makes a step forward or there is a risk of fragmentation.”

The UK Treasury views such banking union proposals as a “single financial backstop for a single currency”, something which Mr Osborne believes is desirable provided Britain is not expected to take part.

However London is watching carefully to see how the proposed banking union develops. David Cameron, the British prime minister, demanded at a fractious Brussels summit last December that Britain wanted safeguards to ensure the EU’s single market – covering all 27 member states – is not compromised by closer eurozone co-ordination.

Mr Barroso said Britain should be allowed to opt out of such plans – as long as it did not block their progress. While he acknowledged this could further isolate Britain within the EU and was not his preferred choice, Mr Barroso said it was imperative to ensure Britain stayed in the EU.

“It’s of course the British right to decide if they want or not to join further steps of integration,” Mr Barroso said. “If other countries that are not in the euro area want to join us, I think Britain is going to accept this.”

Mr Barroso cautioned that his plans for a banking union, which will begin to be fleshed out as part of a road map to be presented at an EU summit at the end of the month, are part of the EU’s longer term effort to respond to the crisis and should not be seen as a substitute to address current market turmoil.

He said the weekend decision to bailout Spanish banks showed the EU could act decisively in the short term, adding that he urged a reluctant Mariano Rajoy, the Spanish prime minister, to accept the aid during a phone call to Madrid last week.

“It was our position in the commission, as it was when I spoke with him last week, that a programme was necessary and it was both in the interest of Spain and the euro area to have a decision,” Mr Barroso said. “The prime minister of Spain reacted extremely positive to this idea.”

Additional reporting by George Parker in London

http://www.ft.com/intl/cms/s/0/ccb2f...#axzz1yvbWAHtb