Franco-German rift derails banking union deal

Member state officials will continue negotiations in preparation for the return of ministers next week.

Meanwhile, Shiarly attempted to clarify the possible future role of the €500 billion European Stability Mechanism being able to directly prop up cash-strapped banks. "Once the single supervisory mechanism is up and running it will be possibly for the ESM to directly recapitalise banks", he said.

As expected, the question of the scope of the supervisory framework is at the centre of a Franco-German disagreement. France is keen for the entire 6,000 strong eurozone banking sector and for the legal framework to be rapidly implemented. Germany, meanwhile, is anxious to keep its regional savings banks outside the supervisory regime, with the ECB focusing only on overseeing the bloc's systemically important big banks.

Speaking during the public deliberations, German Finance Minister Wolfgang Schaeuble made a thinly veiled threat that his government would oppose full supervision. “It would be very difficult to get approval by the German parliament if (the deal) would leave the supervision for all the German banks to European banking supervision,” he said.

“Nobody believes that it would work,” Schaeuble added.

French Finance Minister Pierre Moscovici, meanwhile, spoke in favour of a banking union structure “that covers all banks, and that is under the final control of the ECB.”

“In the end it must be the ECB that has the responsibility on the whole. Otherwise, there is no real system of banking supervision,” he said.

The ten countries outside the eurozone are also coming under concerted pressure to sign up to the banking union reforms. The UK, in particular, is wary that being marginalised in decision-making could weaken the City of London's position as the preeminent financial centre in Europe.

Other countries, including Sweden and Denmark, worry that the ECB's governing council, which only includes central bankers from the 17 eurozone countries and the 6-man executive board, would shut them out of key financial sector decision making.

The UK's House of Lords EU committee is expected to warn that a fragmented implementation of banking supervision rules could "threaten the integrity" of the single market in its report on the implications of the new supervisory regime.

Finance ministers will reconvene in Brussels next Wednesday (12 December) and attempt to tie up the remainder of the the legislation.

With ministers unable to agree on a negotiating mandate, the prospect of the two files being passed before the end of 2012 has dimmed. Even if ministers can agree a mandate before the summit, it will not be possible to conclude a deal with MEPs in the European Parliament before the Christmas break.

A parliament vote on the proposals had been pencilled in for next week's plenary session in Strasbourg but will not take place making the January session the next window of opportunity.