Call for sole monitor of EU banks heads to key summit

ROME -- The European Council is taking a watered-down plan to remake Europe to a key EU summit that promises to be fractious given the battle lines that are already drawn.

Bank supervision in the European Union would be shifted to a European supervisor and government would seek approval from other countries to run budget deficits, according to a broad outline of the plan prepared by European Council president Herman Van Rompuy.

His seven-page report, titled Towards a Genuine Economic and Monetary Union, presents a new design that could prevent another crisis for the euro zone, the embattled 17-member monetary union. Economists, though, believe any progress toward a banking and fiscal union, with common oversight of finances, will be halting at best and certainly not fast enough to prevent the current troubles from potentially spiralling out of control.

"We consider that convergence remains insufficient to produce any 'silver bullet' response to the current sovereign crisis," said Deutsche Bank economist Gilles Moec.

The report was released Tuesday as Spanish and Italian sovereign funding costs continued to rise .

Mr. Van Rompuy's report is less ambitious and more vague than earlier drafts. His newest version makes no mention of short-term efforts that could be used to take the edge off the crisis, nor does it lay out a timetable for a banking and fiscal union.

It does, however, call for a single supervisor to oversee all banks within the European Union, not just the big, trans-border banks.

"Such a system would ensure that the supervision of banks in all EU member states is equally effective in reducing the probability of bank failures and preventing the need for intervention by joint deposit guarantees or resolution funds," the report said. "To this end, the European level would be given supervisory authority and pre-emptive intervention powers applicable to all banks."

The effort to bring all the banks under one supervisory umbrella is recognition that some of the regional savings banks in Spain, Italy and Germany are big enough to transmit pain throughout the European banking system should they get into trouble.

The paper proposes several initiatives that would be politically impossible to implement in the near term. They include euro bonds, which would pool the debt of the euro zone countries in an effort to bring down the funding costs of the weakest ones, and veto powers on national budgets.

German Chancellor Angela Merkel has rejected euro bonds and other common efforts, such as joint deposit insurance, for fear that they may not pass muster in the German constitutional court and because they may remove the incentive among governments and banks to clean up their financial acts.

Ms. Merkel reiterated her opposition to a euro bond Tuesday, Reuters reported, quoting sources, telling coalition partners in a closed-door meeting that "I don't see total debt liability as long as I live."

Still, some economists think the Brussels leaders' summit on Thursday and Friday will make some progress in creating a European federal banking supervision scheme, plus growth plans to offset the harsh, German-inspired austerity measures.

Greece, Spain, Italy and France have all called for a growth plan to complement austerity, which they blame for killing growth. The deepening recession in Italy is particularly worrisome because it is the euro zone's third-largest economy. Investors' fears that Italy's enormous debt load is becoming unsustainable is pushing up bond yields to near crisis levels.

There appears to be little agreement on which fiscal and banking union measures should come first, and over what time period, spelling trouble for the summit.

"Germany wants to seed deeper fiscal integration with firm controls on expenditure and taxes first," Societe Generale economists said in a Tuesday note. "France, Italy and Spain would like to see more risk sharing as a priority. Our vi ew remains that little tangible is likely to result from the European Council, leaving markets vulnerable over the summer."