UPDATE 1-German, French leaders to discuss EADS, banking union

Fri Sep 21, 2012 4:30pm EDT

* France, Germany defend jobs in EADS/BAE merger

* Leaders will discuss euro zone banking union

* Merkel, Hollande work on their strained relationship

By Alexandra Hudson and Elizabeth Pineau

BERLIN/PARIS, Sept 21 (Reuters) - Angela Merkel and Francois Hollande will scrutinise plans by EADS and BAE Systems to form an aerospace and defence giant on Saturday but are unlikely to give final go-ahead to a merger fraught with economic and security concerns.

Airbus maker EADS is anxious for stakeholders France and Germany to set out their position on the merger, and has warned that if Berlin and Paris's approval is tied to too many conditions it could abandon the proposed $45 billion union.

Under British stock market rules, EADS and BAE have until Oct. 10 to announce whether they will go ahead. A German government spokesman said on Friday no decisions were expected during the leaders' working lunch in Ludwigsburg.

Sources familiar with discussions say that without a clear political direction it is unlikely the companies will be ready to present a detailed plan in time for that deadline.

Executives of both firms are engaged in a hectic charm offensive directed at political leaders, but investors fear a lack of synergies and that heavy state interference could hamstring the future company.

EADS shares dipped after Germany withdrew expectations of a joint position with France at Saturday's talks, but one source close to the negotiations dismissed the move as a "bluff".

France and Germany hold different cards going into the talks, with France controlling a 15 percent stake in EADS and Germany protecting its interests through a stake held by car firm Daimler but without a direct stake in EADS.

Analysts say Germany sees the transaction as an opportunity to rebalance its interests, but France may be unwilling to be pressured into trading concessions for the sake of a common position given the mismatch of shareholdings. Germany and the UK, meanwhile, remain mistrustful of French interventionism.

The German chancellor, who this week described her relationship with France's new Socialist president as a "trusting" one, will also discuss proposals - opposed by Berlin but largely backed by France - for the European Central Bank to oversee all euro zone banks.

The summit marks a speech in Ludwigsburg by French leader General Charles de Gaulle 50 years ago when, in fluent German learned as a prisoner of war during World War I, he pledged reconciliation and respect.

The alliance has been strained since conservative Nicolas Sarkozy's replacement by Hollande, whose calls for more growth measures are seen as a rebuff to Merkel's austerity agenda.

"Each time there has been a change in the Franco-German leadership couple there have been teething problems, but each time the different personalities have found a way to work together," said a senior French diplomat. "This time the crisis has added a sense of urgency."

Merkel and Hollande have managed to show unity, such as in their joint message for Greece last month saying there can be no leeway on its bailout terms unless Athens sticks to tough reform targets.

"I think their relationship has developed well, they've made an effort to get on after so many warned of trouble ahead," said Ulrike Guerot at the European Council on Foreign Relations.

MERGER HEADACHE

De Gaulle, who in the 1960s withdrew France from NATO's military command, symbolized French efforts to have its own defence capability with an industry to match. But soaring costs and weak national budgets have imposed European co-operation.

France has kept a foot in both camps, working with Germany to set up EADS but maintaining its own defence supply base to support Dassault Aviation, whose Rafale combat jet competes with the Eurofighter led by EADS and BAE.

Safeguarding jobs, a source of past Franco-German conflict in EADS, will feature highly at Ludwigsburg which is just a few hours' drive from a dozen EADS sites ranging from a helicopter maintenance firm in Baden Baden to a radar developer in Ulm.

France's European Affairs Minister Bernard Cazeneuve has said there are "a huge number of obstacles to clear" before a merger could be achieved, but he has also noted the strategic logic of creating a European defence champion.

Commenting on EADS on Thursday, French sources said: "It's obvious we will be looking at this project from the point of view of its ability to create employment, notably in France."

Daimler has also queried the deal's financials, a source familiar with the situation said. The carmaker declined comment.

SUPERVISION ROW

On the ECB's new bank oversight remit, Germany's view that this should be limited to systemically-relevant and cross-border institutions falls far short of the European Commission's more extensive proposal, which is backed by Paris.

Giving the ECB a bigger role is part of the euro zone's efforts to provide a long-term fix for its sovereign debt crisis, providing better supervision and safeguarding bank stability in sovereign states that get into difficulties.

French Finance Minister Pierre Moscovici said on Wednesday he saw room to bridge differences on the timing and the scale of the reforms, calling it "simplistic to characterise this as some kind of clash". German thinks the self-imposed January 2013 deadline is unrealistic.

Claire Demesmay at the German Council on Foreign Relations said bank oversight reform mattered greatly to the French leader who sees it as "a symbol for more integration and solidarity without having to give up national sovereignty".

"France also sees this as a step on the way to achieving more commonality, after the idea of Eurobonds failed," she said.