UPDATE 2-Germany pushes back against rapid EU banking union
* Merkel says stronger centralised banking body required
* Chancellor says EU banking authorities failed on Spain
* Bundesbank member: bank union needs central fiscal powers
By Annika Breidthardt and Sarah Marsh
BERLIN, June 12 (Reuters) - Germany's Angela Merkel and its central bank pushed back on Tuesday against calls from other parts of the euro zone for the rapid establishment of a banking union, saying it could only come as part of a drive towards economic union.
The European Central Bank and European Commission are keen to move swiftly to cross-border supervision of the bloc's biggest banks, and a deposit guarantee scheme, and see Spain's bank bailout as a first step in that direction.
But Chancellor Merkel and a Bundesbank member said more sovereignty must first be given to central authorities to impose economic discipline on member states and measure their banks' performance more effectively than the European Banking Authority (EBA) watchdog.
Merkel praised Spain's decision to request up to 100 billion euros ($125 billion) of European Union aid for its debt-stricken banks and laid the blame on the Spanish property bubble that has saddled the sector with bad debts.
She told a meeting of business supporters that the European Banking Authority's remit had been undermined by national oversight bodies acting "out of misguided national pride", which had led to inaccurate stress tests, she said.
"No sooner had we finished the recapitalisation phase of banks from the EBA stress tests when it emerged that the Spanish stress tests were not correct," she said in a speech.
"If we need European institutions that provide better oversight of banks, we have to be prepared to give up more national supervision," she said.
"I want a Europe where it is always clear that common liabilities and common controls are in the same hand. It cannot be that we communitarise liabilities but leave control in the national jurisdiction," said the chancellor.
A German central banker said a banking union must be anchored in a fiscal union, with powers to stop member states breaking budget rules, because a banking crisis in one country "may require the use of taxpayer money from other countries".
The Bundesbank's Sabine Lautenschlaeger said in a speech to a banking supervision conference that "whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises".
The German stance puts a banking union on the same time-consuming track as the treaty change needed to create an economic union, a process likely to take years.
The leaders of the European Central Bank and the EU Commission have urged much swifter agreement to help the bloc's banks, which have been lending heavily via the bond markets to over-stretched governments and are also nursing bad debts from the region's slide into recession.
French Finance Minister Pierre Moscovici said on Tuesday that the planned aid package of up to 100 billion euros for Spain's banks was the first step towards a euro banking union.
Jose Manuel Barroso, president of the European Union's executive European Commission, pushed the plan for all the bloc's 27 countries to submit their big banks to a single cross-border supervisor as early as next year.
Britain, which hosts Europe's biggest banking centre, should be able to opt out as long as it did not block the plan, he told the Financial Times.
The European Central Bank's Christian Noyer said the ECB should get new, wide-ranging supervision powers over large banks in a banking union, saying the ECB and national central banks were "well equipped to be the backbone of the financial union".
Germany has expressed concerns that plans for an EU-wide bank deposit guarantee scheme and a rescue fund paid for by levies on financial institutions could mean it risks footing the bill if there are no proper safeguards.
In the same vein, it continues to reject calls for common euro zone bonds, with Merkel calling the debate an unwelcome distraction and adding that her country could not condone proposals that would only exacerbate the sovereign debt crisis.
"Germany - and I can say this for the whole country - is prepared to do more on integration but we cannot get involved in things which I am convinced will lead to an even bigger disaster than the situation we are in today," said Merkel.
Finnish Prime Minister Jyrki Katainen, one of Merkel's key allies in the euro zone, said he saw some benefit in economies with top credit ratings issuing a form of mutualised debt - if they had "at least one A in their credit rating".
Such instruments "could be very liquid and it might push average yields down - even to benefit countries like Germany and Finland," he told the event in Berlin attended by Merkel.
But Katainen questioned whether it was advisable to shield countries from "market pressures" to keep their public finances in good order, echoing arguments made by Merkel against such bonds. Finland and Germany are among only a small handful of remaining euro zone countries with a triple A credit rating.
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