Analysis
The battle for banking union
By Honor Mahony
In their last meeting before the summer break, EU leaders spoke about the need to break the "vicious link" between banks and sovereigns. The kind that allowed lenders to take unnecessary risks while local politicians conveniently looked the other way.
Now, just one week before a legislative proposal is to be tabled, the "vicious link" is in danger of being allowed to stay. And if it does, it will be down to significant lobbying by German Landesbanken and Sparkassen. In other words, the system will have lobbied to keep the system.
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At stake is whether a single banking supervisor should oversee all 6,000 euro-area banks.
Berlin wants only big banks to be directly monitored. The rest, as finance minister Wolfgang Schaeuble recently wrote in the Financial Times, are to be treated differently.
The European Commission has said it will work out a compromise with Germany.
But in doing so it risks completely stripping the proposal of any of its usefulness.
It is not large banks, such as Deutsche Bank, where scrutiny is a problem, but much rather their smaller regional cousins.
Key issues that that will have to be dealt with in the banking proposal include how often banks are checked. Will it be on a weekly or monthly basis? Will the European Central Bank - the likely supervisor - give explicit orders or just make suggestions? Will Frankfurt will able to close down a bank? If so, in what circumstances and who will foot the bill?
At Germany's insistence, what is likely to emerge next week is a half-baked solution. There will be a European supervisor. But the national supervisors will ultimately hold sway.
This will essentially mean that no interfering and no much-needed light will be shined on Sparkassen or on any other small or medium bank in the eurozone. They will continue to operate under the scrutiny radar.
If this is the case, it will be go down as yet another of the eurozone's sticking plaster solutions.
More broadly, it will undermine Germany's case for closer political integration - ultimately involving treaty change - in the EU.
Berlin has been arguing to its somewhat mutinous euro partners that more scrutiny powers, particularly over national spending, need to be given to Brussels.
This, it says, would give confidence to the markets and prevent such a eurozone crisis from occurring again. Much the same case could be made for a European banking supervisor with bite.